Renovation Tax Credit a hit with consumers

OTTAWA–A new poll suggests more than one in three Canadians plan to take advantage of the federal government's home-renovation tax credit.
More than eight in 10 questioned in the Harris-Decima/Canadian Press survey said they were aware of the program, under which eligible applicants can receive a tax rebate of as much as $1,350 if they invest up to $10,000 in renovations on their home.
"Unlike many new tax policies, which only get noticed by accountants and actuaries, the government of Canada has successfully communicated the introduction of the home-renovation tax credit to Canadians," said Harris-Decima's senior vice-president, Jeff Walker.
"This program appears to be helping stimulate the economy as well."
Nationally, 82 per cent of respondents were aware of the home-renovation tax credit, while 17 per cent said they were unaware. Those under age 35 and those with annual incomes below $60,000 were least likely to know of the tax credit.
Overall, 35 per cent of respondents said they planned on taking advantage of the program, while 60 per cent said they would not.
The ratio of those who planned to take advantage of the program increased with income.
More than half of those earning more than $100,000 a year (51 per cent) responded positively, compared with 41 per cent of those making between $60,000 and $100,000 and just 27 per cent of those earning less than $60,000.
Respondents west of Ontario were the most likely to be taking advantage of it.
Some 1,000 Canadians were surveyed June 18-21, with a margin of error of plus or minus 3.1 percentage points, 19 times in 20.

Rates, Inflation....what does this mean?

Recently a reader of my blog asked me to comment further on the relationship between interest rates and inflation, and the performance of the market.

With respect to the first part on how interest rates and inflation are related you need to understand that there are economic laws at play with these two itmes. Inflation ALWAYS affects both short term AND long term interest rates in two very different ways.

With respect to long term rates, you need to remember what drives long term rates, that is long term bonds. Therefore one needs to know that as inflation rises bond yields ALWAYS go up. When bond yields go up (as they have been steadily for the past 6 weeks) then fixed rates ALWAYS go up. As for how that affects the stock market, TRADITIONALLY as bond yields rise people flee the stock market which then does bring the stock market down in lockstep as bonds rise. Couple this with the expectation that there will be periodic profit taking from the stock market as there has been recently and you can wit certainty predict that the stock market will continue to be volatile for 12-18 months as we navigate inflation rising.

With respect to short term rates remember that variable rates are priced off short term t-bills or Bankers Acceptance rates. Those rates are determined solely by the central banks overnight rate. TRADITIONALLY, the central banks ONLY weapon against inflation is to raise the overnight rate. As this happens of course then variable rates go up.
What does all this mean with respect to the real estate market then?
Well, first we would all do well to understand and accept that the ONLY reason we have seen a quicker recovery to the real estate market is SOLELY based on the fact that both long and short term interest rates are at significantly historical lows. That means readers would say “based on what Angela said above if inflation rises (which EVERYONE expects that it will) then interest rates will rise respectively, which will cool the recent rebound in real estate.”

The answer to this is “not necessarily”. Let me explain in point form below:

1) Short term rates may not go up as fast as inflation this time around
There are two reasons for this, number one is that the Bank of Canada has repeatedly said recently that they are not going to touch the overnight rate until June of 2010. However they have also been adding the caveat recently that they may change this stance if inflation surges out of control. My guess is that they will let inflation get slightly ahead of their comfort zone, and then attack it, which means we will get a the rest of this year and maybe Q1 of 2010 at these unbelievably low variable rates.

The second reason is that as the banks cost of funds continue to drop and they start reducing the risk premium they have been attaching to their loan pricing they will drop their premiums over prime to gain more market share. This has already been happening as a few months ago the best deal you could get was Prime +.80% and today you can get Prime +.45%. Look for this premium to be dropped all together in the coming months, and likely we will be back into Prime Minus within a year or so.

2) Interest rates are sooo low now

What I mean here is that even if interest rates were to rise by 1 to 1.5% in the coming year we would STILL be below “normal” historically. Therefore how much would this cool the real estate market?

3) Never bet against momentum

As interest rates start their slow climb back to normal levels many people will panic and get into the market to buy “before rates go higher” this momentum will gain steam as it goes. We will likely continue to see a strong real estate market with strong demand as rates rise. Of course as rates rise above say the 5% level again then affordability becomes an issue. If strong demand causes a bigger then expected rise in average price, coupled with a decline in affordability then remember what we learned in the last crash as soon as average home prices start to overshoot our growth in family income then you can absolutely predict with certainty a real estate correction. This time we will be ready.
With Oil rising quietly lately and the fact that it will likely be over a $100 or close to it by years end and the fact that the US money multiplier will rise (more of the billions they printed to get out of the banking crisis enter the market) you can count on inflation. But don’t count on that shutting down the real estate market in the short run. It will be a few years before we will see a cooling or an outright correction. Tread carefully.

As a final note, PLEASE anyone taking a new mortgage today, or any of my colleagues selling mortgages today, make sure you can afford the house you are contemplating if interest rates were in the 5 to 5.5% range. better yet, set your payments today as if the rate WAS 5.5%. Why?
because when you renew five years from now, count on the fact that it will be that or maybe higher, and that you will likely have moderate equity gain in that time period and you will not be able to count on a refinance to bail you out.
Let’s not repeat our past mistakes, gluttony is a cardinal sin remember.

Do not handcuff your mortgage

Don't handcuff your mortgage
Gary Marr, Financial Post Published: Saturday, June 13, 2009
Would you like to pay an extra $300 per month on your mortgage? Not likely.
That hasn't stopped a number of Canadians, with the deal of a lifetime on a variable-rate mortgage, from switching over to a more expensive fixed-rate product and paying the extra freight.
A fear of rising rates is driving the rash decision. But if you've finally managed to pin your banker to the ground, why on Earth would you let him off the mat?
More than 28% of Canadians have a variable-rate product tied to prime, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP). If you negotiated a deal before October of last year, chances are you are now borrowing money for as little as 1.35%. That's based on deals that at one point saw the banks giving 90 basis points off prime. Prime is now 2.25%.
The average sale price of a home last month in Canada was $306,366. Based on a 25% downpayment and a 25-year amortization, your monthly payment would be $962.61 at 1.35%. Convert that to a five-year fixed-rate term and you're probably going to have to consider a 4% mortgage rate and a monthly payment of $1,289.04.
Rates are rising fast. Most major banks upped their five-year rate by 40 basis points this week, although discounters were still offering 4% this past week.
"It's not a mass rush yet, but we are starting to see ... people locking in. But variable rates are still so good," says Joan Dal Bianco, vice-president of real estate-secured lending, TD Canada Trust. She stops short of questioning why a consumer would pull out of these "deals" that are no longer available on the market.
Try to get a variable-rate mortgage today and the best you can probably hope to get is 60 basis points above prime, or 2.85%.
The landscape changed dramatically in October during the credit crunch. As the Bank of Canada lowered rates, the major banks reluctantly lowered prime because of the massive amount of customers with variable-rate products negotiated under the old, higher terms.
"Bonds yields are going up rapidly and people are starting to realize the rates are going to go up," Ms. Dal Bianco says. Throw in the fact the Bank of Canada used the weasel word "conditional"(on inflation rates)when it promised not to raise rates until June, and you can understand why some people think today's record-low prime rate might not hold.
But if you're someplace between 60 to 90 basis points below prime, the rate is going to have to go up pretty fast to justify locking in today at 4%, even though that is just slightly above the all-time low hit last month for a five-year term.
"I don't understand why you would lock in," says Jim Murphy, chief executive of CAAMP. "Sure, if they start to rise, but [Bank of Canada governor Mark] Carney says they won't rise, so you've got another year at that prime-minus rate."
Don Lawby, chief executive of Century 21 Canada, says even when rates do start to increase, they are not going to jump significantly right away. You are not going to get 4% on a fixed rate again, but double-digit rates seem unlikely. "The only logic two locking in would be for someone very sensitive to any rate change and they just want to be secure," Mr. Lawby says.
But at what price? If you're using the "feeling secure" logic, why not go for the 10-year fixed-rate product? Rates on that product can be locked at 5.25%, ridiculously low by historical standards. Yet fewer than 10% of Canadians consider a 10-year product.
There are some compromises you can make. For starters, there is nothing to prevent consumers from having a blended mortgage at most Canadian banks. Some banks will let you take half your outstanding debt and lock it in. Diversity is preached for stock portfolios, but few people seem to adhere to the same philosophy when managing their debt.
Consumers might want to take their cue from business. Few companies would want all of their debt coming due at the same time -- it presents too much risk. The other option is knocking down principal: Make payments based on a 4% rate and have that extra $300 go straight to your principal every month.
The bottom line is if you've got a deal on your mortgage, why would you give it back?
Dusty wallet Double check your credit card statements. DW is in a bit of a skirmish with Visa over a taxi cab bill. Of course, DW is too cheap to use cabs, but does succumb to them to get to and from airports on vacation. Last trip, the family took an airport limousine and paid the $56 charge. Guess what? The same amount was billed a month later. So far, the taxi cab company has yet to produce a second receipt. In the interim, DW had to pay the second $56 charge.
gmarr@national-post. Com
Fed not likely to raise rates
Peter Hodson, Financial Post
Recently, there has been some loud talk about inflation and how the U. S. Federal Reserve is going to have to start raising interest rates soon in order to nip inflation in the bud.
When first confronted with this news, you may have said, "Hogwash! No way in this economic backdrop could the Fed raise rates, slow down growth and risk sending us into a steep 'double-dip' recession."
That certainly would be my view. It's unclear at this point even if we are coming out of recession, so it really would be premature to slow things down at this point before any growth traction has been achieved.
However, let's not just make assumptions. Let's delve into history to see what the Fed has done in prior cycles.
The last U. S. recession was from March, 2001, to November, 2001, a period of eight months. The Fed funds rate was 6.5% from June, 2000, to January, 2001. In January of that year, the Fed lowered the rate to 6%, then went on a 12-month lowering frenzy during the recession and in the aftermath of the 9/11 attacks. By year-end 2001 the Fed funds rate was 1.75%, with the Fed still maintaining an easing bias.
Despite the official ending of the recession in November, 2001, the Fed maintained very low interest rates for almost three more years. In fact, it kept lowering rates, down to 1% from June, 2003 to May, 2004. This strategy of keeping rates low despite no recession is now widely blamed as the reason for the creation of the housing bubble that popped in 2007. The Fed finally raised rates in June, 2004, a full 30 months after the recession had ended.
In the recession of July, 1990 to March, 1991 (eight months) the Fed had been easing or maintained a neutral bias since February, 1989. At the start of that recession, the Fed funds rate was 8.25%. By the end of the recession, it was down to 6%. Again, despite the recession being over, the Fed kept jamming rates lower, all the way down to 3% in December, 1993. The Fed didn't raise rates again until February, 1994. In that recession, again the Fed kept lowering rates for 30 months after the end of the recession.
Going back further into history, in the recession of July, 1981 to November, 1982 (16 months) the Fed acted a little more quickly. In May, 1981 the Fed rate was 20.0%. By December of that year, the Fed had moved rates down to 12%. In the spring of 1982, though, rates were back to 15%. But, showing signs of confusion, by the end of the summer 1982, rates were much lower, at 9.5%. The Fed was tightening rates again by September, 1982, and for a period of time investors had no idea what to expect, as the Fed moved rates up or down seemingly at random for a period of 18 months.
In the energy crisis of the early 1970s, the recession lasted from November, 1973, to March, 1975 (16 months). In November, at the start of the recession the Fed funds rate was 9.00% but by May, 1974, because of inflation fears the Fed had already raised the rate to 13%. Recession fears, however, ultimately ruled the day, and by year-end 1975 the Fed rate had been cut in half, to 4.75%. The tightening began anew, however, in April, 1976, 13 months after the official end of the recession.
What can we conclude? One, it seems sometimes that the Fed is just winging it, moving rates at random in response to short-term events. But it does seem the Fed is unwilling to raise rates too quickly after any recession.
Based on the severity of this economic downturn, you would have to conclude the Fed is unlikely to risk a double-dip recession, and will keep the Fed funds rate very low (now 0% to 0.25%) for a long time.
This may, of course, cause inflation, but for the time being, that is still better than a giant de-leveraging economic death-spiral.
peter@sprott.com--- - Peter Hodson is a senior portfolio manager at Sprott Asset Management.

Can bonds come back?

While the article below is about the US 10 year bond, many of the definitions, observations and statements apply to our Canadian benchmark 5 year bond. Hopefully this will give you some insight as to what is happening with our unusual yields in the bond markets….
Can bonds come back?
David Pett, Financial Post
By definition, the concept of a 10-year treasury note could not be simpler: "A debt owed by the United States government for a period of 10 years." In reality, there may not be a more complicated investment anywhere in the world, considering both its sway on financial markets and its role as a key benchmark for the health of the global economy.
These days, the 10-year government note is back under the microscope. At issue is the rapid rise in yields so far this year, despite drastic measures from the U. S. Federal Reserve to keep interest rates low. Investors are wondering if the 2½-year bond bubble has finally burst and whether they should take their money and run before inflation rises up to consume it.
"The sell-off in the treasury market has gathered substantial momentum in recent weeks, causing problems for stocks and threatening to choke off a still-weak economy," said Chen Zhou, managing editor of global investment strategy at BCA Research in Montreal, in a recent note to clients. "The next up-leg will only develop when the riot in the bond market dies down."
Since late December, yields on 10-year treasury notes have nearly doubled, rising from 2.05% to 3.89% yesterday. That has taken them back to levels established just before the collapse of Lehman Brothers in September, but they still remain more than 130 basis points below the high of 5.3% set in December, 2007. The Canadian 10-year government yield has also risen, to 3.75%.
The "riot," as Mr. Zhou called it, is more the result of yield trajectory. Why have yields increased so much, so fast?
On the one hand, the sell-off can be attributed to so-called "bond vigilantes," who have expressed growing concern that the United States will eventually drown in its ballooning federal budget deficit. This year alone, the U. S. Treasury will sell a record US$2-trillion in new debt to fund its projected US$1.8-trillion deficit. By some estimates, the country's debt, equivalent to 41% of GDP at the end of 2008, could hit 100% of GDP over the next five years.
The fears surrounding the deficit intensified on May 21, when Standard & Poor's downgraded its outlook for Britain's triple-A rating from stable to negative. According to the International Monetary Fund, the U. K. will see its debt reach 72.7% of GDP by 2010.
Paul Ashworth, senior U. S. economist with Capital Economics, believes the answer is far more positive: The rise in treasury yields reflects welcome signs of economic recovery and the diminishing need for safe-haven government bonds.
"It's not so much that everyone thinks the U. S. government is going to go broke -- it's that they are not quite so worried that the other people are going to go broke," he said. "So, they are willing to buy corporate bonds, they are willing to buy commercial paper and they are willing to buy equities. Things are starting to return to normal."
The U. S. Federal Reserve, for its part, must determine whether the bond sell-off is a sign of a impending fiscal collapse or a reflection of growing optimism about an economic recovery.
"If it is the former, there will be another round of financial market mayhem with falling stocks, rising bond yields and a plunging dollar, warned Mr. Zhou. "If the latter is the case, then the recent sell-off could soon set the stage for a bond rally, which could occur in tandem with a resumed advance in stocks."
One of the only ways left for the Fed to fight the rise in treasury yields is by raising the speed and scale of its long-term asset purchases. With interest rates already at near-zero levels, the Fed announced in March a controversial plan of quantitative easing, saying it would buy up to US$300-billion in longer-term treasury bonds. In addition, it has stated it will buy up to US$1.25-trillion of mortgage-backed securities and US$200-billion of debt issued by agencies like Fannie Mae and Freddie Mac.
The goal in making these pledges is to reduce interest yields on government bonds and home mortgage rates, thereby encouraging banks to lend money with less fear that borrowers will default on their loans.
Pump too much money into the system too quickly, however, and the Fed runs the risk of creating runaway inflation when the economy recovers. Conversely, in Japan, during the 1990s central bank officials grew impatient and unwound their stimulus before its true effect could take hold. The economy has been sliding in and out of deflation ever since.
As of last week, the Fed had purchased little more than a third of the total amount of long-term assets it agreed to buy.
If the rise in yields reflects a return to economic and financial normality, then additional quantitative easing would do little to bring down inflation expectations and may even be counter-productive, Mr. Ashworth said.
He also pointed out that the rise in the actual borrowing costs facing households and firms has been more modest than the jump in the 10-year treasury yield. "Mortgage interest rates have remained broadly unchanged over the past few months and corporate bond yields have been falling. While the Fed might be a little concerned that mortgage rates are rising at all, it would take a much bigger increase to prompt a reaction, particularly an unscheduled reaction that might be interpreted as panic."
Still, Mr. Zhou says the Fed will have to step in and purchase treasury bonds more aggressively to keep borrowing costs low. "The right course of action for monetary authorities to take is to focus on fighting deflation and not worry about inflation, Mr. Zhou said. "If the central bank wants to keep mortgage yields at low levels, or move them even lower, it must find ways to supress treasury yields."
Such a move by the Fed, Mr. Zhou added, would help set the stage for a significant bond rally in the near term. He predicts the U. S. bond market will remain weak until bond yields reach 4%, at which point a rebound will develop.
Ultimately, says David Rosenberg, a bearish economist at Gluskin Sheff & Associates in Toronto, bond yields will drop when the economic recovery stumbles. "We just crammed into less than six months what took more than 48 months to do during the last bear market," he said.
"But the history of credit collapses and asset deflations is that you don't rebuild Humpty Dumpty in a matter of days or months, but years. The shift to riskier assets, from safe havens, has created a tremendous buying opportunity for [bond investors] with a six-to 12-month outlook. We will finish the year with yields measurably lower than they are today."

We are rising from the bottom-look for rates to increase as well as real estate prices!

Harper: 'The worst is behind us'
Prime minister encouraged by new data that suggests economy is in recovery mode
Julian BeltrameThe Canadian Press OTTAWA
Canadians have reason to breathe a little easier -- the economy fell sharply at the start of the year but talk about another depression appears to have been just talk.
Having been given the best economic news in months, Prime Minister Stephen Harper was quick to take advantage yesterday, saying the Liberals have no reason to push for a federal election.
"I think the worst is behind us, we will have better quarters going forward,'' Harper said in an interview with a Toronto radio station.
"I think that's one of the reasons (Liberal Leader Michael) Ignatieff seems to be pushing so hard with ideas to get the other parties to bring the government down. He would love the opportunity to get in there for a recovery. The country needs an election like a hole in the head,'' Harper added.
The output numbers for the first quarter of 2009 were nothing to boast about. The economy contracted by a massive 5.4 per cent at an annualized rate, the worst in 18 years when there was a 5.9 per cent decline in 1991.
But with the Bank of Canada having projected a 7.3 per cent collapse and some economists saying the decline could be as much as nine per cent, the Statistics Canada data has the feel of a death row reprieve.
And the improving data for the last two months of the quarter -- February and March -- suggests that as Harper noted, the worst is likely over and it happened during the November-January period.
"It is the worst recession since the Great Depression globally, but this is where some of Canada's positives have come back to save us a bit from something nastier,'' said Douglas Porter, deputy chief economist with BMO Capital Markets.
"Make no mistake, it's a very severe downturn. But we've been through these kinds of severe downturns before in the early '80s and early '90s.''
Combined with the revised 3.7 per cent drop in the fourth quarter of 2008, Liberal finance critic John McCallum said the slump still qualifies as among the worst since quarterly data began being kept in 1961.
But he too expressed relief that "there is less panic than there was a while ago . . . and more sense that, 'Yeah, we are going to get out of this."'
McCallum said his party will still press for improvements to unemployment insurance to ensure that more laid-off Canadians qualify for benefits, saying the economy will likely continue to shed jobs for months to come.