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What the Bank of Canada rate hike means for Canadians

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image 1 http://www.mississauga4sale.com/rates.jpg

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how far down the rabbit hole will you go?

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how far down the rabbit hole will you go?

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website 1 https://www.thestar.com/business/2018/05/29/canadas-banks-downplay-concerns-about-household-debt-interest-rates.html

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OTTAWA-Canada sets interest rates Wednesday, and there's widespread concern about what any further borrowing-cost increases might mean for consumers, their immense pile of debt and the housing market.

It's one of the reasons to be bearish on Canada. Steve Eisman, who was featured in Michael Lewis's book The Big Short, told Bloomberg TV this month that investors should short Canadian financials, citing looming housing "issues."

The risk of debt overhang and reduced customer spending have kept the Bank of Canada on hold since January. (Adrian Wyld / THE CANADIAN PRESS File Photo)

The country's largest lenders are warning against overplaying the concerns. While unprecedented debt levels pose risks, they say there won't be any major upset to the economy for a number of reasons, including the view Bank of Canada Governor Stephen Poloz won't press ahead with higher rates if signs of stress begin to emerge.

While the debt levels are a problem, "we don't expect it to derail the economy, just because we expect Poloz to go quite gradually, or more gradually than what might have warranted hikes in the past," Brittany Baumann, macro strategist at Toronto-Dominion Bank said in a telephone interview.

Other reasons not to panic - according to economists at the other five major commercial banks - include households' ability to keep monthly payments on mortgages in check, a manageable number of home-loan renewals and the still-low cost of borrowing.
Read more: Mortgage rates are rising. Here's how you can save money When repaying debt, mobile phones come before cars
Bank of Canada expected to refrain from rate hike until July

That Canadians are heavily indebted is without question. Household debt - mortgages and consumer debt such as credit cards - has swollen to $2.1 trillion, and levels as a share of income are easily the highest in the Group of Seven. Two-thirds of that is mortgages. With the central bank raising rates three times since July and with more hikes to come, there's concern things could get messy.
Mortgage Renewals
Yet, rate rises will be gradual and it will take a while for that to flow through to households, according to Nathan Janzen and Robert Hogue at Royal Bank of Canada. More than 40 per cent of outstanding residential mortgage debt issued by federally regulated financial institutions is five-year, fixed-rate, and for those resetting now, rates aren't much different than they were five years ago. The central bank's effective household interest rate - a weighted-average of various mortgage and consumer credit rates - was 3.64 per cent on May 11, compared with 3.54 per cent in May 2013.

"It will take a while for the full impact of higher rates to hit household incomes," Janzen said by email. "Household ability to pay is increasing along with interest rates. The economy looks strong, labour markets look tight, and wages have been increasing more quickly."

For variable-rate mortgages, depending on how the loan is structured, rising borrowing costs won't necessarily translate into higher monthly payments, but could mean instead a longer amortization period.

Canadian Imperial Bank of Commerce estimates only about 20 per cent of outstanding household debt - mortgage and non-mortgage - has so far been exposed to higher rates.

"It's actually not a huge number, which kind of dampens the headline effect of, 'Oh, there's such a huge amount of mortgages coming due,'" Ian Pollick, head of North American rates strategy, said in a phone interview.

Matthieu Arseneau at National Bank Financial says the "payment shock" from elevated household debt and rising rates will equate to a mere 0.24 per cent off aggregate disposable income this year. Considering real disposable income has grown about 2.5 per cent annually over the past decade, the shock will turn out to be more of a "slight touch on the brakes" of consumer spending, he said in recent a research note.
Poloz's Path
Poloz has been mindful of the risks of the debt overhang. The central bank estimates that due to elevated household debt, the reduction in consumer spending "might be as much as 50 per cent more in the two years following a persistent change in interest rates."

Such concerns have helped keep the central bank on hold since January. Poloz is expected to leave the benchmark rate unchanged at 1.25 per cent this week.

"The bank is at a slower rather than a faster mentality," Pollick said, with CIBC predicting just one more increase this year.

Most economists anticipate debt worries won't be enough to keep Poloz on hold forever.

Derivatives trading suggests two more hikes by the end of the year, to 1.75 per cent, and Poloz has been emphatic that rates will eventually go higher. The Bank of Canada estimates its "neutral rate" is about 3 per cent.

The Bank of Montreal predicts two more rate increases this year, and three more next year. National Bank sees Poloz hiking twice more this year and twice next year. Royal Bank of Canada projects 100 basis points of increases between now and mid 2019. TD predicts one more hike this year and one in early 2019.
Robust Economy
But even as rates rise and consumers pare back spending, another mitigating factor is a relatively robust economy that can handle modest increases in rates.

Sal Guatieri at Bank of Montreal thinks the only things that could really derail the economy are a recession or a sharp increase in borrowing costs, neither of which is likely.

"We don't foresee a recession, we still place relatively moderate odds of one occurring over the next couple of years and we certainly don't see a big spike in interest rates over the next couple of years," Guatieri said.

In fact, the economy is so strong, there may be little reason for the central bank to remain cautious at all, according to Derek Holt at the Bank of Nova Scotia, particularly if it stops its rate hike cycle well below the neutral rate. He predicts the central bank will double its benchmark rate to 2.5 per cent by the end of 2019.

The increased sensitivity of the economy to rate hikes doesn't mean Poloz "cannot continue hiking along a fairly aggressive path," Holt said by email. "It just means there is a lower end point in this cycle and over the longer run."

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Canada's banks downplay concerns about household debt, interest rates | The Star

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OTTAWA-Canada sets interest rates Wednesday, and there's widespread concern about what any further borrowing-cost increases might mean for consumers, their immense pile of debt and the housing market. It's one of the reasons to be bearish on Canada.

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video 2 https://www.bnnbloomberg.ca/economics/video/what-to-expect-from-the-canadian-economy-in-2018~1293358

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website 2  http://business.financialpost.com/news/economy/a-third-of-canadian-executives-expect-economy-to-get-worse-amid-political-spats-nafta-uncertainty-survey

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OTTAWA - Optimism about the Canadian economy among business directors has waned over the past year, according to a new survey, as various domestic political squabbles, rising interest rates and uncertainty surrounding the North American Free Trade Agreement talks dampen Canada's business outlook.

An annual survey from the Institute of Corporate Directors (ICD) released Monday found that 33 per cent of respondents expected the Canadian economy to improve in the next two-to-five years, down from 52 per cent in 2017. In the 2018 survey, 34 per cent of respondents now expect the Canadian economy to worsen while 26 per cent expect it to stay the same.

The findings come as the Canadian economy is expected to slow significantly from its red-hot growth in 2017. Canada's GDP grew 3.1 per cent in 2017, but edged down 0.1% in January and managed a tiny 0.4 per cent gain in February. However, wholesale sales rose 1.1 per cent to $62.8 billion in March, while manufacturing sales were up 1.4 per cent, above analyst estimates, according to Statistics Canada.

"Despite positive economic news from Statistics Canada, Canadian directors see trouble ahead for the Canadian economy," the report said.

The results could point to a divide between the economic outlook in the U.S. and Canada, after accounting firm KPMG released a survey of American CEOs earlier this week that suggested economic optimism in the U.S. is at its highest in years.

The ICD survey asked 584 of its members about various business risks including NAFTA, rising interest rates and U.S. corporate tax reform.

NAFTA was considered among the main headwinds for companies, as well as political uncertainty within Canada, mostly tied to "strained" inter-provincial infighting like the dispute between Alberta and British Columbia over the Trans Mountain pipeline expansion, the report said.

Only eight per cent of respondents expected Canada's political situation to improve "somewhat" or "significantly" over the next two-to-five years, while 34 per cent expected the situation to worsen "somewhat" or "significantly." Fifty-eight per cent of respondents said they expected it to stay the same.

Asked how confident directors were that Canada could "successfully re-negotiate or modernize" the NAFTA trade agreement, 46 per cent were somewhat confident while 41 per cent were "not very confident" and 10 per cent "not at all confident."

Asked whether Canada's economy could stay strong if officials fail to reach a deal, 46 per cent were "somewhat confident" while 41 per cent were "not very confident."

On U.S. corporate tax reform, 24 per cent of respondents said the impact on their company or non-profit would be explicitly negative, while 15 per cent said it would be positive. Some companies with U.S. operations have seen the changes as an overall positive, as it could create new investment opportunities for their businesses south of the border.

Meanwhile, 41 per cent of respondents said minimum wage increases would be negative for their company, while six per cent expected it to be positive. Fifty-eight per cent said rising interest rates in Canada would be negative for their company while 21 per cent viewed it as a positive.

Bank of Canada Governor Stephen Poloz has raised key interest rate three times in the past year, up to 1.25 per cent, mostly to temper rapid growth in the first half of 2017.

Most analysts now expect the bank to hold rates in its next decision May 30, as trade uncertainty and a slight weakening of the Canadian dollar, among other factors, but see interest rates gradually rising through 2018 and 2019.

Asked what the biggest external risk facing their company or non-profit was, most respondents (42 per cent) cited cyber risk, followed by regulatory complexity and government changes (18 per cent), disruptive technology (17 per cent) and global economic instability (13 per cent).

Directors were slightly more confident in the global economy than in Canada, with 36 per cent of respondents saying it would improve "somewhat" in the next two to five years. Twenty-seven per cent said it would worsen somewhat while 36 per cent said it would stay the same.

The ICD survey was conducted by Environics Research between March 7 and April 4, 2018, and yielded a response rate of 4.7 per cent overall. That sample size is considered accurate to within 3.8 percentage points, 19 times out of 20.
* Email: jsnyder@nationalpost.com | Twitter: jesse_snyder

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A third of Canadian business directors expect our economy to get worse

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OTTAWA - Optimism about the Canadian economy among business directors has waned over the past year, according to a new survey, as various domestic political squabbles, rising interest rates and uncertainty surrounding the North American Free Trade Agreement talks dampen Canada's business outlook.

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HALF of All Mortgages Need To Be Renewed in 2018! People Will Be Pushed Over the Edge!

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the effects of changing interests rates. 

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the effects of changing interests rates. 

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website 3 http://www.moneysense.ca/spend/real-estate/mortgages/how-interest-rate-hikes-will-affect-canadian-homebuyers-in-2018/

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Time to get ready for a return of the popularity of the five-year mortgage? Twenty years ago, in the mid-1990s -conventional wisdom still held where most home buyers and mortgage holders opted for five-year-closed mortgages, as a hedge against the ominous threat of rising interest rates. The security of locking in a constant, predictable mortgage payment for the long term was more valued than hunting for the lowest possible variable rate mortgage.

Times changed, of course, as everyone piled into short rates that floated. Why? Because for the past few decades they have floated down. Super-low-rate variable mortgages became the preferred salve for new homebuyers and helped drive the boom in real estate prices because buyers could afford more house and carry more debt.

But 2018 doesn't bode well for borrowers and mortgage holders. Not only will a more stringent stress test be put in place for those seeking or renewing a mortgage, but the Bank of Canada's November Financial System Review, issued this week, raised another complicating factor; that being, nearly one in two Canadian mortgage holders is set to renew their mortgage in the next 12 months and will face higher rates.

Some forecasters are expecting several additional rate hikes during 2018, and it could all add up to a shock for consumers, the real estate market and the broader economy. More rate hikes could close the gap between short-term and longer-term mortgages and start to push consumers away from variable and into fixed mortgages where they would be insulated from the immediate impact of further increases.

READ: How Canadian homes became debt traps

In January, a stress test that goes into effect that includes new rules introduced by the Office of the Superintendent of Financial Institutions (OFSI) on mortgage lending. OSFI is setting a new minimum qualifying rate, or "stress test," for uninsured mortgages (mortgage consumers with down payments 20% or greater than their home price).

The rules now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder's contractual mortgage rate. So no matter how much money a homebuyer puts down to purchase a home, they will have to pass the stress test.

Additionally, the BOC report confirms that it will slowly but surely pace itself with interest rate hikes next year in order to achieve more normal interest rate levels that back away from the super low rates we've experienced in recent years. So far this year, the Bank has raised their key interest rate twice as it monitors how the higher borrowing costs will impact the economy.

First-time home buyers, as well as homeowners who need to renew their existing mortgages in 2018, will face headwinds from stricter mortgage qualification rules as well as interest rate hikes. The result of such increases will be immediate. "We see a 75-basis-point increase in the bank rate in 2018, with the three 25 bp increases coming in March, July and October," says Jennifer Lee, senior economist at BMO. (25 basis points equals a quarter of a percentage point.) "This will dampen housing activity."

Benjamin Tal, senior economist at CIBC, somewhat agrees with this assessment but his view is more tempered. Tal sees the economy chugging along at about 2% GDP going forward after a blip to 3% GDP earlier this year. "The consumer played a big part in lifting the economy this year but we're not sure they will continue to do so," says Tal. "We just don't see big demand out there and that's the recipe for a slow down to us."

As for interest rates, Tal sees the Bank of Canada possibly moving twice in 2018 but he believes it's likely we'll see less than that-and maybe even no rate increases at all. "The economy is slowing, and negotiations over NAFTA are still unresolved," says Tal. "That's a big deal, and if NAFTA is terminated by the U.S., we believe any rate increases will be put on hold. So far Canada hasn't been responsive. We've been paralyzed... But all that will change if NAFTA ends." BMO's Lee agrees with Tal. "All of our BMO economic projections for 2018 assume that NAFTA is not terminated," says Lee. "But everything changes if NAFTA is impacted.

So, what does that mean if you're going to be renewing your mortgage in 2018? Or simply buying a new home as a first-time buyer? "Meeting the new, more stringent mortgage stress test will have a similar effect as an interest rate hike," says Tal. So that's already built into the cake.

Tal says that about 12% of the total mortgage market will be impacted. "Some of those borrowers will go with a short-term adjustable rate mortgage and they will qualify, while others will lengthen the amortization period of their mortgage to qualify. But there will also be a third group who will go to alternative lenders because those lenders aren't subject to the new 2018 mortgage stress test. As the BOC report says, "17% of outstanding uninsured mortgages are held by provincially regulated credit unions which are not affected by the new OFSI guidelines." So, it's possible that many of those who want a home and mortgage could qualify for one of these alternative mortgages.

Even so, Tal believes the final impact on the housing industry next year will be huge: a reduction in demand of 6% to 7%. "This means that first-time homebuyers will stay home longer, rent longer, or simply buy a home that's cheaper and more affordable for them," says Tal. "The impact will be felt nationwide, not just in large cities like Vancouver or Toronto. It will be an across-the-board impact because of lower household incomes in other parts of Canada."

Lee from BMO agrees, adding that some could even tap the Bank of Mom and Dad to meet the mortgage requirements. "Many buyers will be looking for a house longer, and they'll have to change their expectations by buying a smaller home with perhaps a longer commute," says Lee. And those who are renewing could simply forgo moving to a new lender and stay with their current mortgage holder so they don't have to subject themselves to the new test.

Whatever home buyers and homeowners decide, Lee is sure of one thing: home sales will take a big hit. "This year home sales were down 4.5% while prices are up 14.5% year over year," says Lee. "But next year we forecast a 3% sales decline and a small 1.5% price increase. For 2019, we see sales remaining flat and price increases of about 2.5%-very modest. Of course, these numbers factor in the interest rate hikes and the certainty that NAFTA remains in place."

And while Tal says that a majority of homeowners have been behaving conscientiously and have been using low interest rates to speed up principal payments, it's first-time homebuyers who will be impacted most. "They are vulnerable and have been blinded by the affordability mirage," says Tal.

For Tal, the key to a successful rate reset doesn't lie in how many rate hikes are in the cards, but in the timing of those rate hikes. And that's where expected BOC rate hikes could go off the rails next year. "Over what period of time will those rate hikes happen? It's better to do it in three to five years rather than quickly. I don't see an appetite for the Bank of Canada to raise rates quickly this [coming] year."

Lee sees the BOC's march towards higher interest rates through a different lens. "It's not a bad thing to make sure homebuyers can handle higher rates," says Lee. "It's important to ensure that Canadian consumers and mortgage holders can cope in a rising rate environment."
MORE ABOUT INTEREST RATES:

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How interest rate hikes will affect Canadian homebuyers in 2018

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Time to get ready for a return of the popularity of the five-year mortgage? Twenty years ago, in the mid-1990s -conventional wisdom still held where most home buyers and mortgage holders opted for five-year-closed mortgages, as a hedge against the ominous threat of rising interest rates.

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mortgage rates risk 2018 - Google Search