Tuesday, October 8, 2013

Mortgage Market Commentary for October 8, 2013

  • TSX +29.60 to 12,788.25 (CP) as investors nervous about the debt impasse in Washington pushed bullion prices higher.
  • DOW -136.34 to 14,936.24 tumbling below the 15,000 pt mark as the U.S. government entered a second week of a partial shutdown as Democrats continued to resist calls from Republicans to link funding to changes in the country's three-year-old health-care law and to spending cuts. It's becoming clear that the Republicans intend to extend that linkage to raising the government's debt limit, which will be reached on Oct. 17.
  • Dollar -.20c to 96.96c US amid a housing report that missed expectations. Statistics Canada said that Canadian municipalities issued building permits worth $6.3 billion in August, down 21.2 per cent from July. Economists had expected a drop of only 15 per cent.
  • Oil -$.81 to $103.03 US
  • Gold +$15.20 to $1,325.10US as investors looking for safety pushed December bullion ahead. Gold will rally in periods when uncertainty is high and thus investors seek the safety of a hard asset. Conversely, gold will rally when the economy is doing much better and inflation expectations are ticking back up. “It’s really a sentiment asset, a reflection of fear or euphoria in the market over the short term”, observed Craig Fehr, a Canadian markets specialist

Canadian 5 year bond yields markets -.02 to 1.87. The spread (obtained by subtracting the bond yield above from the industry average 5 yr rate published mortgage rate of 3.79) is centered within the profit range at 1.92. If the increase in bond yield continues upward, the spread shrinks, which could prompt interest rates to rise. The range for investor desired profitability is currently a bit lower than in the past, more in the region of 1.80 and 2.00.

Wired to spend: How alluring tech add-ons are hiking our expenses
Christine Dobby | 05/10/13 | Financial Post 07/10/13

Paying for your iPhone is just the beginning
This summer’s war over wireless competition touched on that most familiar of Canadian complaints — high cellphone prices — but on top of the technology expenses we have grown accustomed to paying, a new generation of alluring add-ons is quietly expanding our communications and entertainment budgets.

Cellphones were once an extravagance of only the very busy and important — today the average household in Canada has two. Add in a slew of extras and financial experts say the cost of communications and entertainment goes well beyond the basic monthly rates many of us pay.

“People see their cable, Internet and cellphone bills as a sunk cost. They’re spending $180 per month and it’s like [paying for] heat — they just see it as a lost cause,” says Fabio Campanella, a partner at Toronto accounting firm Campanella McDonald LLP. “Then they start adding additional costs on, like an on-demand movie for $7, or Netflix for $8 a month that they use once a month.”

While 86% of households continue to subscribe to traditional television services, a generation raised on the Internet is increasingly going online to watch.

In 2012, the average Canadian household spent $185 a month on television, Internet, landline and cellphone expenses, according to the country’s telecom regulator.

That breaks down to $67 a month on cellphones, $31 on Internet, $52 on television and $35 on landlines, the Canadian Radio-television and Telecommunications Commission said in its annual report on the sector published in late September.

But the report also pointed to new forms of entertainment capturing communications dollars.
Annual growth in the number of subscribers to traditional cable and satellite services has slowed to just 1% although about 12 million households were still signed last year, according to the CRTC.

Yet, on top of that, one-third of Canadians watched programming online last year and the average user spent three hours a week watching.

Netflix Inc., which offers on-demand streaming movies and television for a monthly fee, does not disclose its Canadian subscriber numbers, but the CRTC estimates that by the fall of 2012, about 17% or 5.9 million Canadians paid for the service.

The average Canadian household spent $185 a month on television, Internet, landline and cellphone expenses.

That’s a significant jump from the approximately 2.1 million subscribers the commission estimated Netflix had in the spring of 2011.

“Twenty years ago you had a landline and a TV, period,” Mr. Campanella says. “Now a family of four have a landline, they have two to four cellphones, they have cable, they have Internet, they have Netflix and they’re seeing everything as an individualcomponent or expense. They’re not looking at the overall communications expense that the family is dishing out every single month.”

There are many ways to access online content for free but numerous subscription services are also popular.
In addition to Netflix, people might spend on streaming music services that charge fees for premium access, Skype or other Internet calling applications that charge for certain features, movie rentals and purchases on iTunes, subscriptions to online publications or sports platforms, and even a service that gives users a U.S. IP address to facilitate access to content blocked outside the United States.

Rogers Communications Inc. just announced it will soon launch the digital magazine subscription service Next Issue for Canadian users, offering monthly access to more than 100 of the most popular U.S. magazines as well as its own publications. The news was exciting for Canadian magazine fans but it will still add another $10 or $15 (depending on the package) to monthly spending. I’m going to tell you that a lot of people don’t look at their bills

Although television subscribers are relatively stable in Canada, the trend toward spending more on the Web is undeniable and telecommunications providers are taking steps to protect their existing businesses or capitalize on the online opportunity.

One strategy is to sell less popular services, such as landline telephones, along with desirable ones and bundles have never been more popular: There were 10 million subscriptions with bundled services last year, the CRTC says, up from 5.8 million in 2008, a compound annual growth rate of 16.9%.

The surge in use of online services to consume programming has also dramatically increased the amount of Internet bandwidth people use.

The average residential Internet subscriber downloaded 28.4 GB and uploaded 5.4 GB per month in 2012, a considerable increase from just one year earlier, up 56% and 42%, respectively, according to the CRTC.
While users, particularly younger ones, may be diverting their money from traditional cable packages to online services, telecommunications companies can recoup some of that with more expensive high-capacity Internet plans. Plus, Canadians are consuming more media on mobile devices than in the past, offering an opportunity for the wireless arms of companies such as BCE Inc., Telus Corp. and Rogers to realize new revenues on mobile data.

Mr. Campanella says the habit of charging all of this to a credit card helps spur indiscriminate spending, in part because many people place too much importance on collecting reward points.
“People buy things they don’t need and let it route to their credit card and at the end of the year, they’re happy because they get a cheap flight to New York.”

Jeanette Brox, a certified financial planner and senior financial consultant with Investors Group in Toronto, says many of her clients aren’t carefully tracking what they’re paying for.

“I’m going to tell you that a lot of people don’t look at their bills,” she says. “It’s either coming out of their bank account or it’s charged to their credit card bill.”

The average household that spent $185 per month in 2012 had an income of about $77,000, according to the CRTC, making the $2,220 in annual spending on TV, Internet and phones about 2.8% of annual income.
Households in the lowest income bracket, earning less than $28,000, spent $119 per month or $1,428 per year — 8.4% of their yearly earnings.

The highest earners, households with more than $112,000 in annual income, spent 1.7% of that on those expenses: $258 a month or $3,096 annually, according to the CRTC.

Not included in those figures are the additional expenditures Mr. Campanella says didn’t exist 10 or 20 years ago.

“It’s a hidden cost that people aren’t paying attention to that maybe if people made some cuts they could save $50 a month, save $500 or $600 a year and it adds up,” he says, noting that if a 35 year-old saved $500 a year, invested at 5% for 30 years, he or she would have an extra $33,000 at retirement.

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