Month: February 2011

If you would like to reduce day-to-day energy consumption and lower your
monthly costs, try these practices:
1. Wash only full loads of dishes or clothes.
2. Use cold water for more loads of laundry; hang clothes to dry when you can.
3. Air-dry dishes with the washer door open.
4. Make a sweep through each room before going to bed (or before leaving home for a longer
period of time) and turn off all electrical devices, including television or stereo equipment,
gaming consoles, computers, monitors and printers.
5. Unplug appliances or use power strips to avoid “phantom” energy use, as most electronics draw a
small amount of power even when they are turned off.
6. Use fans for cooling rooms instead of air conditioning.
7. Close window coverings when the weather is warm to keep out heat generated by direct sunlight; open them up when it’s cool outside so the sun’s rays can help warm the space.

That’s the question posed by an article in the latest issue of the Bank of Canada Review, and it’s a good one.

The report, by Jason Allen of the central bank’s financial stability department, notes that the big banks that dominate the market tend to adjust interest rates faster when they’re on the way up than they do when rates are falling.

While it come as no surprise to borrowers that such is the case, the article draws an interesting conclusion: That such behaviour by banks and other lenders may have broader implications for Canada’s monetary policy, and that the central bank may want to take this into account when it comes time to plot strategy.
The report comes on the heels of a decision by the federal government to tighten mortgage rules as a way to head off a potential real estate bubble.

All the major lenders in this country tend to offer the same types of mortgage products, credit cards and other services, and in fact Canadians tend to treat their bank as a “one stop shop” where they buy a majority of their financial services, according Mr. Allen.

Leaving aside the issue of whether this is a healthy situation, the author concludes that the mortgage market is “consistent with a model where consumers have different preferences and skills when shopping and bargaining for a mortgage and where lenders maximize profits based on observing these preferences and skills.”

Simply put, borrowers are often complacent and end up paying more than they should.

One of the quirks of the industry in Canada is the prevalence of mortgages with terms of five-years or less, even though the loans amortize over as much as 40 years, according to the article.

Citing a recent study by John Kiff, a senior financial sector expert at the International Monetary Fund, it notes that Americans, by contrast, tend to opt for longer term mortgages than do Canadians, and they have a much broader choice.

The benefit of longer terms is that they provide the borrower with better protection against the risk of rising interest rates. If a loan is amortized over 25 years, the best way for the creditor to ensure he can always make the payments is to take a 25-year term.

Some economists refer to five-year products as “balloon mortgages” because of the possibility that the payments may suddenly shoot up at the end of the term.
Borrowers are also left vulnerable to “roll-over risk,” that the lender may be unwilling to renew the loan at any price.

According to Mr. Kiff, the main reason 10- and 20-year mortgages aren’t more common in Canada is because financial service providers consider them uneconomical.
Whenever banks make home loans they generally protect themselves from the risk that the customer may pay the money back early by including strict repayment penalties. But current regulations put strict limits on such penalties. “So the banks have this wall at five years,” Mr. Kiff said in an interview.

Bottom line: Lenders can’t charge what they feel they need to charge so they don’t offer longer term mortgages at an affordable price.

Mr. Kiff, who previously worked at the Bank of Canada, said Canadians would be better served if there was more choice of longer term mortgages. The IMF recently recommended that the federal government change the rules around mortgages so that lenders are able to provide broader product choice without unnecessary limits on how they charge for products.

What needs to happen is “at least, let the market determine where the rates should be,” he said. “What [mortgage] works best depends on the borrower, on the borrower’s own personal situation.”

jgreenwood@nationalpost.com

Original Source: http://business.financialpost.com/2011/02/17/why-do-mortgage-rates-rise-fast-fall-slowly/

CREA released a revised forecast Tuesday that estimates that 2011 home sales will be down 1.6%, and that prices are estimated to rise by 1.3%. With regards to the forecasts in sales activity, “CREA predicted Tuesday that some sales that would have been made later in the year will likely occur in the first quarter, as a result of the new rules.

Some economists have warned that a combination of higher interest rates and new mortgage rules that go into effect March 18 could put a chill on demand in the later months of this year”. “This is expected to produce a milder version of the volatility in sales activity that we saw last year which resulted from additional transitory factors,” said CREA’s chief economist Gregory Klump.

So we are looking at an active trading season over the spring, but does that mean the summer and fall will be slower than normal? Normally yes, as CREA said earlier – “some sales that would have been made later in the year will occur in the first quarter”, however, CREA also goes on to say that the market will gain traction in the second half of this year as economic conditions, job and income growth and consumer confidence improve, in contrast to 2010 when economic growth softened.

So all in all, it looks like we have some stability in the forecast. The spring will be a little exciting as usual, then it will likely slow at the tail end of the spring, then come back to normal throughout the summer.

RBC gives similar values and a similar story in this report: http://www.cbc.ca/money/story/2011/02/10/rbc-housing-forecast.html

It’s not a sexy market, but the word is FAIR.