Why a rate hike won’t be a blow to most

MICHAEL BABAD

Globe and Mail Blog
Posted on Tuesday, February 1, 2011 6:32AM EST
Bank of Canada Governor Mark Carney and other policy makers have no doubt been scaring the pants off consumers who have loaded up on debt like there's no tomorrow. Well, there is a tomorrow, and that was their aim.

But while the risk of overweight debt levels is a "significant" one to the economy, the effects of the inevitable rise in interest rates should not be oeverestimated, National Bank Financial says in a new reportMr. Carney has warned repeatedly that household debt levels are too high, and Finance Minister Jim Flaherty recently tightened up the mortgage market again. This came as the ratio of household debt reached a whopping 148 per cent of disposable income, a level higher than in the United States.

"It's not that Canadians are throwing money out the window," said Yanick Desnoyers, assistant chief economist at National Bank Financial.
"Rather they are buying more houses, taking the homeownership rate to a record 70 per cent. Since very few homebuyers pay cash, the resulting indebtedness is hardly surprising."
About 40 per cent of homeowners have no mortgage, compared to 31 per cent in the United States, Mr. Desnoyers found.
And given that some 30 per cent of Canadians rent, about 58 per cent of households pay no mortgage interest. Coupled with that is the fact that the net equity of owners in their homes is "very high," more than 60 per cent, compared to 39 per cent in the United States.

Also on the plus side, Mr. Desnoyers said, is the mix of mortgage products.
Two out of three mortgaged homes have pay a fixed rate, leaving just 14 per cent with a variable-rate mortgage.
"In other words, the great majority of Canadians are not exposed to a monthly-payment shock from a rate rise," he said.
"Though a larger proportion of households have home-equity lines of credit, all at variable rates, it remains that a rise in interest rates will not be an overnight blow to the bulk of households."
For a while, it looked like consumers were heeding the warnings, and the increase in credit was easing. But new numbers yesterday showed household credit climbing 0.6 per cent in November, from a month earlier, and 0.8 per cent in December.

"That was a stronger than a year ago, and lifted the annual trend to 6.8 per cent, but a bit down from the average growth of 7.5 per cent in 2009/10," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. "Adjusted for [consumer price index] inflation, credit growth is running at 4.4 per cent, about 2 percentage points below the average of the past two years."
There are two ways to look at the numbers, according to Mr. Porter, sort of a glass-half-full, glass-half-empty kind of thing.
Even with the rise late last year, growth in household credit is at its slowest in seven to eight years. Of course, even with the softening last year, credit growth remains strong in real terms, and it's still climbing at a faster pace than income.
"It needs to slow more before the [Bank of Canada] will relax," Mr. Porter said.

Making room for a new tax

KERRY GOLD
From Friday's Globe and Mail
Published Thursday, Sep. 23, 2010 1:52PM EDTOther than the build-up to it, general industry response would suggest the Harmonized Sales Tax has had relatively little impact on the B.C. housing market.

"On the whole, the HST’s effect on the market has been more psychological,” says Dan Scarrow, vice-president for Macdonald Realty in Vancouver. “Buyers rushed to buy before July 1st, then sat on their hands for the months following its introduction to see what would happen to the market.”
The underwhelming effect might be due to the fact that the HST only applies to newly built housing, and closing costs, such as inspections, legal fees and commissions. As well, the government offers rebates on houses that are priced lower, thereby exempting a whole demographic of new home buyer. In theory, lower construction costs should close the gap between pre-HST pricing and post-HST pricing

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Bank of Canada stands apart as it raises rates

Jeremy Torobin
Ottawa — From Wednesday's Globe and Mail
Published on Tuesday, Jul. 20, 2010 9:05AM EDT
Last updated on Tuesday, Jul. 20, 2010 7:55PM EDT

.Mark Carney has now done twice what no other Group of Seven central banker appears even close to doing once – he raised interest rates for the second month in a row – but global developments could slow his hand.

Tuesday’s move, which brought the Bank of Canada’s benchmark overnight rate to a still-low 0.75 per cent, reflects Canada’s unique position as a rich country that has recovered almost all of the jobs lost during the recession, where a post-crisis housing boom has already come and gone, and where record overseas demand for safe government bonds is poised to allow Ottawa and the provinces fund a few more years of deficit spending without being crippled by interest payments.
But the Bank of Canada Governor’s window for taking back some of the super-low borrowing costs, both to ensure that inflationary pressures don’t build and to persuade consumers and businesses that they should start paying off debts now before rates go higher, may be closing sooner than expected.
Even as it raised its key rate by one-quarter of a percentage point, the central bank trimmed its forecast for Canada’s economic growth this year and next, as austerity measures in Europe and a fizzling rebound in the United States make for a slower global recovery and a “more gradual” bounce-back at home. Future moves will “be weighed carefully” against developments around the world, policy makers reiterated in the statement accompanying the rate hike, and, in turn, on what impact those may have on Canada’s exports.