Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
Editor's Note: Dave's Monday Morning Interest Rate Update appears on
Move Smartly weekly. Check back weekly for analysis that is always
ahead of the pack.
Last week’s big news was that China clocked a Q4, 2012 GDP growth rate of 7.9%.
This was significant because it reversed a seven-quarter decline in that
country’s growth rate. (By comparison, China’s Q3, 2012 GDP growth rate was
7.4%.)
From a Canadian variable-rate mortgage perspective, it can be argued that
strong GDP growth in China combined with continued weak GDP growth in the U.S.
might just be today’s ideal scenario. Here’s why:
Strong Chinese GDP growth will ensure that commodity prices remain high
because China has been the world’s marginal buyer of commodities since it joined
the World Trade Organization in November 2001. Our economy is still largely
commodity based and as such, the Loonie tends to move in the same direction as
commodity prices (although its recent strength has been underpinned by other
factors as well). Because a strong Loonie acts as a headwind in provinces that
rely heavily on manufacturing and exporting to the U.S. (like Ontario and
Quebec), higher commodity prices will also (indirectly) limit the BoC’s ability
to increase its overnight rate.
If Canadians tend to overlook the significant influence that China’s GDP
growth rate has over our own economic momentum, it’s probably because we engage
in very little export trade with the Middle Kingdom. But China’s role as the
world’s most voracious buyer of commodities should not be discounted. Many
Canadians are surprised to learn that there is now an 85% correlation between
the TSX and the Shanghai index. That’s more than double the correlation between
the TSX and U.S. equities over the past two years, and also more than double the
correlation between the TSX and the Canadian economy.
China’s latest GDP result supports the view that the Chinese economy has
achieved a soft landing, but that could change quickly. Here are my two biggest
areas of concern on that front:
Five-year Government of Canada bond yields were one basis point lower this
week, closing at 1.47% on Friday. More lenders raised their five-year fixed
rates last week but sub-3% rates are still available to well-qualified borrowers
who know where to look.
Five-year variable rates are available at prime minus 0.40% (which works out
to 2.60% using today’s prime rate). While the BoC’s repeated warnings about
imminent overnight rate increases are designed to dissuade borrowers from opting
for a variable-rate mortgage (more on that in a future post), for the reasons
listed above I still think that today’s variable rate may well prove, as it
almost always has, to be the cheapest option over the next five years.
The bottom line: If China continues to grow its GDP at a torrid pace,
it will give our economy an effective hedge against continued U.S. economic
weakness. Such a scenario will effectively tie the BoC’s hands and from a
strictly interest-rate perspective, create an ideal scenario for variable-rate
mortgage borrowers.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave