Bank: rate hike looming

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Another major bank has joined the chorus of pundits forecasting a cooling period for Canada’s housing market as well as a hike to record-low mortgage rates.

“A slowdown in the housing market is also expected to be a drag on spending over the next two years. In the near-term, the impact of the prior decline in mortgage rates and a pick-up in listings after the severe winter should see existing home sales activity improve,” TD Bank’s quarterly economic forecast, released Monday states. “But, the acceleration should prove short-lived as higher fixed mortgage rates (reflecting higher bond yields) start to weigh on activity in home sales in 2015, constraining expenditures on housing-related purchases.”

Residential investment, on the other hand is expected to provide a short-term boost to the economy due to strong housing price increases.

“As for residential investment – which includes construction of new homes, renovations of existing homes and ownership transfer costs – positive knock-on effects from renewed momentum in the existing home market will likely lead to higher residential investment in the near term,” the report states. “Renovation spending will also likely provide a boost through the rest of 2014, due to the positive wealth affect from stronger- than-expected home price growth.”

Overall, Canada’s GDP growth is expected to be modest throughout the rest of the year.

“A particularly harsh winter held back growth in North America in Q1, and an inventory correction is likely to keep Canada’s rebound in the second quarter quite modest,” the report states. “As a result, Canada’s real GDP growth forecast has been downgraded slightly to 2.2 per cent this year.”
 
  • Brian Lambert on 2014-06-24 1:08:24 PM

    The US 10 year bond rate, acts as something of a "price setter"for the Canadian market and is watched closely by the Bank of Canada. The Us 10 year bond is at 2.6% from a year low of 2.4% and has been falling over the past year from a 3.044% high. With the Feds quantitative easing and the Taper still going on I can't see interest rates going up any time soon. Also the stock market is at an all time high and tends to run in 5 - 7 year cycles and we are due for a major correction. With major unrest in Iraq and the chance of a full blown sectarian war this also puts pressure on world markets. A 20 -30% correction in the market could send world markets into a tail spin as we are still trying to work our way out of the great recession. Nothing is fixed yet and we could see rates come down if the world markets unravel.

  • Bay Street on 2014-06-24 1:25:19 PM

    Brian. What are you talking about?? the US 10 year bond has nothing to do with Canadian market place and no one watches that!

  • Brian Lambert on 2014-06-24 1:48:03 PM

    @ Bay Street: Whether you like it or not the US recovery has everything to do with rates rising in Canada and the Bank of Canada will not move in raising rates until the US does. US quantitative easing and the taper have effect our rates and the the Bank of Canada does watch the US 10 year bond as an indicator to were rates are heading. We ride on the US shirt Tails, being our largest trading partner, when they suffer, so do we. Google is a good source of information, maybe you should get informed.

  • Daniel McKay on 2014-06-24 1:58:04 PM

    Agreed, Brian has no clue what he is talking about. U.S. bonds have very little, if any effect on Government of Canada bonds. Canadian Bond yields will start to rise and fixed rate mortgages rates with it, the increases will be gradualthough. I'm in full agreement with the article.

  • J.M. on 2014-06-24 1:59:49 PM

    The writer of this article is contradicting themselves a few time in this uneducated and poorly written report. The subject line and the body of the message have no correlation – but what do I know…

  • Daniel McKay on 2014-06-24 2:15:29 PM

    ??? J.M. the article is talking about how fixed rates will rise because the corresponding government of Canada bond yields will rise. How are you missing the correlation between the title and the body?

  • Brian Lambert on 2014-06-24 3:02:49 PM

    @ Daniel McKay: If you would have read my response to the article, I never said US Bonds have anything to do with Canadian Bonds. I said the Bank of Canada watches the US 10 year bond as an indicator. When the US ten year bond was at it's highest this year of 3.044% we would have expected an interest rate hike, it never happened as the BOC said the economy was to weak to raise rates. You can rest assure that once the US 10 year does creep past the 3% level the BOC will think about raising rates depending on the state of the economy. Banks as we know can raise or lower their fixed rate at any time for any reason. But the BOC controls the Prime rate.

  • Brian Lambert on 2014-06-24 3:03:12 PM

    @ Daniel McKay: If you would have read my response to the article, I never said US Bonds have anything to do with Canadian Bonds. I said the Bank of Canada watches the US 10 year bond as an indicator. When the US ten year bond was at it's highest this year of 3.044% we would have expected an interest rate hike, it never happened as the BOC said the economy was to weak to raise rates. You can rest assure that once the US 10 year does creep past the 3% level the BOC will think about raising rates depending on the state of the economy. Banks as we know can raise or lower their fixed rate at any time for any reason. But the BOC controls the Prime rate.

  • Daniel McKay on 2014-06-24 3:31:56 PM

    @ Brian: The article is only referring to fixed rates, maybe you should read more carefully before posting then.

  • Brian Lambert on 2014-06-24 3:43:40 PM

    Daniel McKay: really, if prime goes up it doesn't affect fixed rates? Get real>

  • Daniel McKay on 2014-06-24 4:12:10 PM

    lol, fixed rates are priced at a spread over the corresponding Government of Canada bond yield. Variable rates are price function of prime lending rates. Both rate type prices are independent of each other. If you don't know that simple fact I'd advise you to quit making a fool of yourself on this public forum.

  • Brian Lambert on 2014-06-24 4:50:48 PM

    @Daniel McKay
    Although seldom used a mortgage index, the prime rate does influence mortgage rates. The prime rates importance as a benchmark generally encourages rates to fluctuate. As prime rates move up in response to BOC increase, loan rates including HELOC's and mortgage rates historically will also move up the same will happen if prime is reduced although there can be a lag time between any rise or fall.

  • Layth Matthews on 2014-06-24 6:28:20 PM

    Hey, I love you guys, but you're all wrong, well maybe Brian is pretty much right. Of course American Bond yields are relevant to Canadian bonds and Canadian fixed mortgage rates. It's a global capital market, hello! However, forecasting one from the other is tough because there are so many layered effects. Sometimes (probably now) US bond yields come off because of flight to safety - the hot money wants US dollars with yield. Canada gets a muted wash over from that. Rising US Bond yields set the floor for Canada bonds and can drive Canadian fixed mortgage rates higher, and be a drag on our economy, even when our economy is weak. So rising Canada Bond yields can and often do, reduce pressure on the BOC to raise prime. As far as the Variable Fixed dilemma goes, the key thing to watch, and what the BOC will watch, especially this particular governor, is employment trends. Employment costs make up 65% of inflation. If you see a labor shortage coming, wage rates rising steady, time to lock-in. In my humble opinion, the relatively recent hikes in gas and food prices that are pushing the headline inflation numbers will actually be a drag on the world economy. No substantial fixed or variable rate hikes in sight.

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