Increasing bond yields over the past week have led a couple of lenders to remove a couple of the super low rate products that were available last week.  However, there are still a number of tremendous rate deals available at the moment.   We may see relatively low rates hang around for a couple of years based on continuing negative projections for the global economy.  Wednesday, the US Federal Reserve indicated that they will not increase rates until the end of 2014 based on a lack of confidence in the US economy improving significantly before that date.   The markets showed that investors think that the Central Bank of Canada will raise rates prior to the end of 2014.   This was seen in the rise of the Canadian dollar which briefly went above par this morning.    Although the comments from the Federal Reserve are just projections, it does show that global markets have greater confidence in the future of the Canadian economy than the US economy.

The Federal Reserve also stated that additional stimulus measures may be required to improve growth prospects.  Since 2008, there have been large stimulus packages implemented worldwide as various countries tried to mitigate the economic consequences of the 2008 crash and subsequent credit crunch.  If stimulus measures continue to be implemented on a large scale, we may eventually see economic growth turn positive faster than without stimulus, but it come with the risk of rapid inflation.    With inflation we will see increases to interest rates.  This may not happen for 3 to 5 years but when it does, we may see rapid increases to interest rates.   This is the main reason that I am recommending a 10 year term to a number of clients that expect to hold their properties for the long term.

In Europe, Italy saw some improvement in the yields for their most recent bond sale.  Italy still has a tough road ahead but this is a step in the right direction.  Greece seems to be the weeble-wobble of the EU economy, just about falling over at every turn.   I think that it is just a matter of time before Greece defaults and goes belly up but just like the weeble-wobble, Greece seems to delay the inevitable at every turn.  Until something more concrete happens in Europe, starting with Greece, the uncertainty will prevent the solid policy change and that is required to move out of this mess.

Jason McLean   BSc, AMP
jason@garibaldimortgage.com 

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Last Friday, the credit ratings agency Standard & Poor, downgraded nine European nations.  This basically means that these countries, or borrowers, are “officially” no longer considered to be as reliable as they were previously.  Although there was a lot of hullaballoo in the media about the downgrades, the markets were really only affected for a day or two.  This is because the various ratings agencies had been warning of potential downgrades across Europe for the past few  months.   Therefore, the markets had already priced this action into their projections and although further downgrades may occur in the future, the current actions should not have surprised anyone.

Yesterday Spain held a successful bond auction that saw bond yields drop to just under 5.5%, a dramatic improvement from over a month ago when yields were over 7%.  However, Greece remains problematic and is still teetering on the brink of default.  Overall, Europe continues to stumble along with bits of good news popping up here and there.

On Tuesday, the Bank of Canada left the Prime rate untouched and expressed concern about the European debt crisis slowing economic growth in Canada for the next year or longer.  Despite recent positive growth numbers, some pundits are predicting cuts of 0.5% to the Prime rate over the next six months.  I think that the Bank of Canada will remain on the sidelines through 2012, saving their few remaining bullets in case the villain that is negative growth rears its ugly head. 

After one lender announced a 5 year fixed term at 2.99% last week, many other lenders have decreased fixed rates and there are a number of appealing options available.  Two lenders have 10 year fixed terms at 3.89% and 3.99% respectively.  If I was to purchase property now, with the expectation of holding the property for at least 5 years, I would jump all over these 10 year terms.  This is a once in a lifetime opportunity for purchasers to lock in tremendously low rates for a decade.   These lenders are not lending on all Whistler properties but there are attractive options for all buyers at this time.

Jason McLean  BSc, AMP
jason@garibaldimortgage.com 

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Another US long weekend is upon us with Martin Luther King Day falling on Monday, January 16^th.   After an unusually busy holiday period for real estate and mortgages, we may see some decent activity from US clients this weekend.  Please remember that for qualifying US residents, financing is available at up to 80% on the first $750k (and 60% of the remaining balance)at very good rates.

In Europe this week, successful bond auctions in Italy & Spain saw significant decreases in yields which will result in more manageable debt servicing costs for both countries.  This positive development may be tempered by new concerns about negative economic indicators coming out of Germany.   Possible recessionary signs in the EU’s strongest economy will make the markets continue to be nervous until more sustained positive news comes out of the region.  To that end the European Central Bank did not move interest  today but many pundits are calling for the lowering of rates at their next announcement.

In Canada, a couple of the big banks are warning of potential decreasing house prices in Toronto and Vancouver.   As I see it, the good news in this is that Whistler has already seen price decreases and should be a good place for long term capital appreciation when compared to most markets in Canada.  Some of the major lenders have started to further decrease fixed rates.  This may become relatively short term rate war with consumers winning if they are able to take advantage within the applicable time period.  Variable rates remain relatively high when compared to fixed rates and are currently not a good option for most clients.  Canadian dollar  is still hovering around $0.98 but despite recent signs of stability, expect to see volatility return over the next few months.

Jason McLean  AMP
jason@garibaldimortgage.com

Comment (1)

Happy New Year!  Although many people use the beginning of a new year to start new good habits and try to quit the bad hits, the global economy just keeps trucking along.  Despite the wish for a reset button, the global economy still faces the same troubles as it did at the end of 2011.  The European debt crisis continues to middle along, although there was some slightly positive news in the bond auctions of Spain and France in the past week.   Expect this situation to continue for the foreseeable future with the effect of depressed global economic demand being the main consequence.

The US is still in a load of debt trouble but since it has been in the situation for so long, the media is having way more fun concentrating on the political rhetoric that comes with an upcoming election.  It is reasonable to expect more political gridlock as politicians running for election want to be seen showing the proper values for their respective voter demographics. 

Fixed rates continue to be steady with slight movements downwards over the past couple of weeks.  Variable rates still look unattractive compared to fixed rates at the moment.  Although variable rates are slightly lower than the fixed rates, the potential for future increases makes the risk/reward equation favor fixed rates. This is a continuing consequence of tightening bank-to-bank credit as institutions remain less likely to lend funds than they were in early 2011.

The Canadian dollar remains at around $0.98 with periods of volatility providing buying opportunities for those looking to buy or sell Canadian dollars. 

 
Jason McLean   604-935-9190
jason@garibaldimortgage.com

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As the European boondoggle carries on, I think this is a good time to look at what 2012 holds in store for our currency and interest rates.

Fixed term interest rates should remain relatively stable over the next year.  We may see about 0.25% movement either way depending on a number of factors but 5 year terms should still be available at less

than 4% by the end of the year.  Even if the fixed rates do increase slightly, they will still be near historic lows and should entice buyers to jump into the market.  Existing mortgages coming up for

renewal in 2012 will definitely see a huge reduction in interest rates compared to the rates that were obtained 4 to 5 years ago.

The Prime rate is unlikely to change in 2012 but the differential from Prime for variable rate mortgages will likely continue to become more expensive.  The days of Prime less 0.90% are a distant memory as

current variable rate mortgages are ranging from Prime less 0.30% to Prime plus 0.30%. The premium over time will likely creep up for most of the next year. This will reduce the already low spread between variable rates and fixed rates  and drive more consumers to take the fixed option.

The Canadian dollar will see continued volatility in value against the US dollar in 2012.  As the European saga continues, daily movements of half a cent to two cents will probably be the norm.  Unless a dramatic

improvement is seen in Europe, the Canadian dollar will likely range between $0.915 and par for most of the year.  However, the regular large movements in the value will provide opportunities for spot trades for those looking to take advantage of the volatility.

With the crystal ball being as cloudy as it is, there is always a chance that any number of events will throw a wrench into even the best projections.  Major events that may change the global economic landscape include:

- If Europe is able to get its act together for the next major summit in March, there would be an increase in the Canadian dollar and a greater possibility for fixed rates to rise.

- If the EU implodes or the Euro is abandoned, then the Canadian dollar will likely fall further in value while fixed rates have a chance of decreasing.

- The US election is always a wild card as promises are made by all parties.

- If the "Arab Spring" movement continues to spread to more countries in 2012, oil prices may be the biggest change which will help Canada but also increase inflationary risks globally.

Jason McLean   BSc, AMP
jason@garibaldimortgage.com

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