The American consumer is starting to move in the right direction.
Benjamin Tal Deputy Chief Economist CIBC World Markets
First quarter US GDP was OK, but nothing to write home about. What's important, however, is that the American consumer is starting to move in the right direction. Will the bruised American consumer regain its traditional role as the main engine of America’s economic growth? We think so. An array of indicators suggests that consumers will build on recent momentum and will probably surprise the market with their regained resiliency.
In Europe, both the UK and Spain are now officially in a recession and once again the market gets nervous. While the European Central Bank will take its time to intervene, there are already some communications from the Bank that it will be willing to reintroduce its lending program if needed. The likelihood is that this kind of merry-go-round will dominate the European markets in the coming months.
Bank of Canada might start raising rates before the end of the year.
In Canada, the government is giving Canada’s banking regulator—The Office of the Superintendent of Financial Institutions—new authority to oversee Canadian Mortgage and Housing Corporation (CMHC). The government is also putting a stop to banks using mortgages insured by CMHC as collateral on covered bonds. We view these two developments as marginally negative to the mortgage market.
It appears that the Bank of Canada is turning hawkish again suggesting that it might start raising rates before the end of the year. Note that exactly a year ago, we were in the same situation when the Bank hinted even more strongly that it will start raising rates, but had to change its mind due to the increased global macro economic uncertainty. At this point the likelihood of a move before the end of the year is about 50%—but even if the Bank starts moving, say in the 4th quarter, it will be a very slow and hesitant move.
The Canadian Association of Accredited Mortgage Professionals (CAAMP) just released their Spring Survey Report on the Canadian Mortgage Market (Published with permission). The report was penned by CAAMP's Chief Economist, Will Dunning. Here are some of the conclusions of that report:
- There is currently $855 billion in mortgages on principal residences and $215 billion in Home Equity Lines of Credit (HELOC)
- Individuals with HELOCs only have an average 65 per cent equity in their homes
- HELOC prevalence is highest among middle age homeowners
- Equity takeouts amount to $26 billion annually, with most funds used for renovations ($9.4 billion), followed by investments ($5.0 billion)
- The average down payment for a home purchased in the last 12 months was 30%, up from 26% for homes purchased two years ago
- Among all borrowers, 63 per cent have fixed rate mortgages, 30 per cent have variable rate mortgages and 6 per cent have a combination of both
- Less than a quarter (22 per cent) of all borrowers have amortization periods longer than 25 years
- 34 per cent of those who most recently renewed or renegotiated their mortgages did so before their term expired.
- The average time to pay off a mortgage is 7.4 years less than the original amortization
- 200,000 homeowners paid off their mortgages in the last 12 months
- The average mortgage interest rate discount is 1.44 per cent for those who chose a five year fixed rate mortgage in the last twelve months with the average mortgage rate being 4.04%
- Of those who renewed their mortgages in the last twelve months, 65 per cent are paying lower rates than previously
- 66 per cent of all mortgage borrowers can tolerate a monthly mortgage increase of $300 or more
- Among borrowers who took out a new mortgage in the last 12 months, 27% obtained it from a mortgage broker.
- Overall mortgage broker share stands at 23%
- Canadian appetite for home buying has returned to pre-recession levels, following a slide over the past three surveys.
- Almost 60 per cent respondents thought that now was a good time to buy
- Optimism is returning to the market with almost half (46 per cent) of those questioned saying that they expect prices to rise
Spring 2011 – Strong First Quarter Growth To Slow As Year Progresses
Benjamin Tal Deputy Chief Economist CIBC World Markets
Canada's fourth quarter growth rate of 3.3% hints of a robust pace to start 2011. Final domestic demand accelerated to 4.7% with healthy gains in all categories except housing construction. Exports posted a more than 17% annualized gain. Corporate profits are 16% above year ago levels, and businesses recorded an over 10% annualized gain in capital spending. Bottom line improvements generally trigger an acceleration in employment growth, so we expect that another 30,000 jobs will have been added in February.
Of course, none of this negates the potential headwinds that lie ahead. Government spending should decelerate with fiscal tightening, consumers will push the savings rate even higher as borrowing costs rise, and exports will feel the deceleration we expect in the global economy through 2011.
Still, Canada is in an enviable position to deal with all of these challenges compared to countries that rely on imported oil or have larger fiscal imbalances.
Interest rates likely to start climbing by July
While we expect growth to slow after such a robust first quarter, our expectation is that the Bank of Canada will begin raising interest rates by July.
Applying Your Tax Refund To Your Mortgage
If you're expecting a tax refund this year, consider using it to make a lump sum payment on your mortgage. You'll be surprised how even a relatively modest amount can have a big impact over time. Your mortgage broker can analyze your situation and show you exactly how much you can save in total interest costs by putting your tax refund to work in this way. Talk to your broker today.