Friday, December 20, 2013

Mortgage Market News for December 20, 2013

  • TSX +57.47 to 13,392.20 (CP) a day after markets responded enthusiastically to the U.S. Federal Reserve's decision to modestly cut back on a key stimulus program. The Fed also emphasized that short-term rates aren't going up any time soon.
  • Dow +11.11 to 16,179.08 The Fed has been using quantitative easing since the financial crises of 2008
  • Dollar +.21 to 93.76 US
  • Oil +.97 to $98.77 US
  • Gold -$41.40 to $1,193.60 US closed at a three-year low with a drop of almost two per cent in the much-battered gold sector as bullion prices resumed sliding after the Fed move. QE had supported gold prices because of inflationary fears. But inflation is tame in many countries and data out earlier this week showed the U.S. consumer price index rising at an annual rate of only 1.2 per cent, significantly below the Fed’s inflation target of two per cent.

Canadian 5 year bond yields markets +.04 to 1.86. The spread (obtained by subtracting the bond yield above from the industry average 5 yr rate published mortgage rate of 3.59) is well below the profit range at 1.73. 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 in the region of 1.80 and 2.00.

Canada household debt-to-income ratio hits record high

Reuters – Fri, 13 Dec, 2013

OTTAWA (Reuters) - The ratio of Canadian household debt to income edged up to a record high in the third quarter but the pace of growth almost halved, which might calm policymakers fretting about high personal debt levels.

The ratio hit 163.7 percent in the third quarter from 163.1 percent in the second quarter, Statistics Canada said on Friday. The ratio increased by 0.34 percent from the second quarter after advancing by 0.65 percent in the second quarter over the first.

The Bank of Canada - which has regularly warned Canadians not to take on too much debt at a time when interest rates are near record lows - has said it sees signs consumers are starting to retrench.

Bank of Canada Governor Stephen Poloz said on Thursday he expected imbalances, including rising household indebtedness, to stabilize and then gradually unwind in coming years.

Analysts noted that the second and third quarters of the year are typically peak times for buying property.

"While the household debt ratio deteriorated again in the third quarter, the Bank of Canada's 'constructive evolution' of household balance sheets appears to be unfolding," said Benjamin Reitzes of BMO Capital Markets Economics.

"Policymakers will continue to watch this metric, but rising interest rates and better income growth should stabilize, then nudge this ratio lower over the next few years," he said in a note to clients.

Mortgage borrowing led the demand for credit in the third quarter, rising by C$19.7 billion ($18.4 billion) to a total of just over C$1.1 trillion.

The central bank on Tuesday said housing sector imbalances - a term used to describe debt, high house prices and over investment in property - were the single biggest internal threat to the Canadian economy.

The household debt-to-income ratio has now risen for two consecutive quarters after back-to-back declines. Poloz said on Thursday consumers had brought forward their plans to buy houses as mortgage rates started to rise.

Poloz also made clear he is particularly concerned about the risks posed by low inflation. The annual rate in October was just 0.7 percent, well below the central bank's 2 percent target.

Mazen Issa, a Canada macro strategist at TD Securities, noted that mortgage credit growth on a year-ago basis had decelerated.

"When taken in conjunction with Governor Poloz's speech yesterday ... (this) lends credence to the narrative that the low inflation backdrop has become the more dominant concern at the Bank of Canada," he said in a note to clients.

Statscan also said that national net worth rose 2.1 percent to C$7.50 trillion in the third quarter.

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