Factors that will affect mortgage rates in the short and medium term.

When my Father was teaching my Brother and me how to drive he had some great words of wisdom that I can relate to our economy. I thought it might be fun to look at what is keeping our economy driving safely on the road and what might be tugging us towards to a ditch or into an accident. I am of course cleaning up the language and not yelling at you while I write this newsletter.

1. Look at the center of the road and step on it, but don’t go too fast!

The US economy appears to be doing better. US equities are on a bull run! There is no doubt that the incredible increase in the market is due to the tremendous amount of money the Federal Reserve in the United States is pouring into its economy. However such dramatic increases eventually become self-fulfilling prophecies. By keeping their sights set forward for the past 5 years the Federal Reserve is now enticing Retail Investor money to pour back into the market which will no doubt lead to further increases in the equity markets. As equities continue to rally bonds will increase in yield. (INCREASE in mortgage rates)

2. If you focus on the ditch that’s where you’re going to put the car.

Short Sellers on Canada; there are many economists, investors and hedge fund managers who feel that Canada is headed for the ditch.

One such Investor (http://www.cnbc.com/id/100726168) feels that Canada’s Banks and Mortgage Lenders are in for a big correction, as housing prices are unsustainable. Whether you believe in these comments or not when people “Short Sell” an economy it typically places downward pressure on Bond Yields (DECREASE in mortgage rates). As Investors move out of Canadian equities they look for safer places to put their money and that means Bonds, thereby driving down yields. It is interesting to note that if these Investors are relying on a drop in housing prices due to increased interest rates shorting the Canadian Economy en masse is providing a headwind to their own trade. Perhaps they should do it a little more quietly?

3. If you go to fast or to slowly you are going to cause an accident.

Housing Market: I have stopped trying to predict when the housing market will slow. Those of you who know me well and have discussed this anytime in the last 5 years will recall me being pessimistic on the Canadian housing market at one point or another. It appears as though I have been quite wrong, (with the exception of a few months in 2008, when I would have been happy to be wrong). I don’t believe that housing prices can continue to increase at the rate they have been. Over the past 2 quarters we have seen some slowing in transactions and pricing, but whether this will lead into a bubble popping is far more correlated to interest rates than anything else. Even with such high prices, it is still more economical to rent than to own in many cases. Any significant drop in the housing market will lead to a pretty serious economic downturn in Canada. The numbers are different depending on who you ask, but most can agree that as a percentage of GDP housing is about 20% (http://www2.macleans.ca/wp-content/uploads/2012/05/HousingGDP.png). It is unlikely that within 2 years of an election the Conservative Government will let Canada slide into a deeper recession. If we see housing slow too much we may see a few of our beloved mortgage features return to revive the housing market (increased amortizations, refinances to 85% Loan to Value). And if it gets really bad….. what about a drop in the Prime borrowing rate? (Keep in mind that this becomes far more probable as the Canadian Dollar continues to drop relative to the USD.) (DECREASE in mortgage Rates)

4. Be prepared for anything.

That’s where we come in. With trusted advice and people looking out for your best interests you are a step ahead of the crowd. Feel free to call our offices with any questions you may have about this newsletter, or your mortgage.