Canada Recession and affect on Mortgage Rates

[00codefinder]

Hi,

We keep reading articles that Canada is being hit with a recession. Just wonder what effects will this have on mortgage rates.

I have a variable rate mortgage now. Just wondering should I lock my mortgage in or will rates continue to fall. Hope we can shed some light on this topic.

Thanks,

00

[jheath]

First of all, if you've got a variable rate mortgage anywhere near prime or below, you're in great shape, keep it and do not lock in unless you get a ridiculous offer (well under 5%) to do so. It's just about unanimous now that there will be another prime reduction on Dec 9th, and if your lender follows, your interest rate will drop again. Ride the wave, it would appear that prime will not be going up anytime soon.
Amongst other factors, the Bank of Canada prime is in place to try and balance economic activity. If the country is spending wildly and inflation begins to get out of control, rates will increase to attempt to curb spending and inflation.
We are currently in an opposite scenario, with some predicting some deflation in the economy. So, the Central banks have no choice but to keep their base lending rate low to try and stimulate spending / economic activity.
Fixed rates at this time are probably a little bit artificially high. Longer term fixed rates (3 years or greater) are generally tied to bond yields. Right now, bond yields are ridiculously low, however rates have not followed as money is tight, reserves are low and interbank lending is practically non existent.

Long answer to a short questions...Keep your variable for now, for sure, no question

[mikeycanuk]

From what I've read bank are losing money on variable rate mortgages and are trying to convert them to fixed. Stay with your variable!!!! F- the banks and don't let them scare you! I'd also be overpaying too to get the mortgage down with such a low rate. Dec 9 is the next BOC rate announcement, rumored to be a .5% cut.

Interest rates won't go up for at least 2 years at which point I'd lock in. There is too much money being pumped into the system and inflation is going be be the bogeyman in 2011+. Right now, enjoy and be thankful! And also try to keep your payment the same and get the principle down as interest rates plummet.

[00codefinder]

wow, thanks guys for the info. Greatly appreciated. And I like what you said, good time to pay extra on the mortgage.

Excellent help.

00

[Newbieinvestor]

wow, thanks guys for the info. Greatly appreciated. And I like what you said, good time to pay extra on the mortgage.

Excellent help.

00
Every day there's a new factory shutting down in Ontario and oil drops crushing Alberta.

The BoC is going to cut rates for at least the next year.

Too bad they didn't take action this time last year when rates were at 6.75:mad:

[liorsyncro]

From what I've read bank are losing money on variable rate mortgages and are trying to convert them to fixed. Stay with your variable!!!! F- the banks and don't let them scare you! I'd also be overpaying too to get the mortgage down with such a low rate. Dec 9 is the next BOC rate announcement, rumored to be a .5% cut.

Interest rates won't go up for at least 2 years at which point I'd lock in. There is too much money being pumped into the system and inflation is going be be the bogeyman in 2011+. Right now, enjoy and be thankful! And also try to keep your payment the same and get the principle down as interest rates plummet.
Well, they're taking a hit on the grandfathered mortgages, that is all those variable mortgages that they had before this credit crisis started, but I wouldn't go as far as saying they're losing money on them. They're taking a hit with their profits, but in most cases they're still in the black. It's their exposure to other risky derivatives, in many cases outside of this country, where they're taking a serious hit and having to write off losses.

In Canada variable rates have always been about .5% less than prime. But believe it or not, in Europe it's not like that. Many banks over there, even in good economic times, rarely pass any central bank interest cuts to their customers, and if they do it's only partial. They justify it as the cost of doing business with them. It's only here in Canada that consumers have been spoiled, and that's attributed to the banks being very conservative with their lending criterias. The banks in Britain, for example, were more reckless and now most of them are partly owned by the government. It started with Northern Rock and since then Halifax and RBS have joined the chorus, and a few other lenders declared bankruptcy altogether.

In response to the original poster, in the short term interest rates will continue to remain low. In the long term, it all depends how quickly the world recovers and to what extent. For example, if you read the newspapers regularly you see how the figures are constantly being adjusted, unemployment, inflation, growth, consumer confidence, etc. Most economists are saying the world will have a brutal 2009 but there should be some recovery around 2010. If that is the case, you should be fine for at least two or three years and enjoy low interest rates. But of course the status quo can change, just like the weather.

The situation of the markets right now is so unpredictable and volatile that no one really knows where we're heading. Once again we'll use Britain as an example. Britain is already is a hard recession and despite that, the Bank of England is not reducing interest rates any further (I believe right now they stand at 3%, ours is 4%). Some have suggested that the BOE should drop the rate to as low as 1% to match the Fed's rate in the States to stimulate the economy, but so far this has not happened. So don't count on dire times to have the interest rate reduced to almost nothing. The best advice is keep yourself informed about what's happening with the markets and you should weather the storm fairly well. And don't let all those tossers at your local bank tell you otherwise!

[Newbieinvestor]

Well, they're taking a hit on the grandfathered mortgages, that is all those variable mortgages that they had before this credit crisis started, but I wouldn't go as far as saying they're losing money on them. They're taking a hit with their profits, but in most cases they're still in the black. It's their exposure to other risky derivatives, in many cases outside of this country, where they're taking a serious hit and having to write off losses.

In Canada variable rates have always been about .5% less than prime. But believe it or not, in Europe it's not like that. Many banks over there, even in good economic times, rarely pass any central bank interest cuts to their customers, and if they do it's only partial. They justify it as the cost of doing business with them. It's only here in Canada that consumers have been spoiled, and that's attributed to the banks being very conservative with their lending criterias. The banks in Britain, for example, were more reckless and now most of them are partly owned by the government. It started with Northern Rock and since then Halifax and RBS have joined the chorus, and a few other lenders declared bankruptcy altogether.

In response to the original poster, in the short term interest rates will continue to remain low. In the long term, it all depends how quickly the world recovers and to what extent. For example, if you read the newspapers regularly you see how the figures are constantly being adjusted, unemployment, inflation, growth, consumer confidence, etc. Most economists are saying the world will have a brutal 2009 but there should be some recovery around 2010. If that is the case, you should be fine for at least two or three years and enjoy low interest rates. But of course the status quo can change, just like the weather.

The situation of the markets right now is so unpredictable and volatile that no one really knows where we're heading. Once again we'll use Britain as an example. Britain is already is a hard recession and despite that, the Bank of England is not reducing interest rates any further (I believe right now they stand at 3%, ours is 4%). Some have suggested that the BOE should drop the rate to as low as 1% to match the Fed's rate in the States to stimulate the economy, but so far this has not happened. So don't count on dire times to have the interest rate reduced to almost nothing. The best advice is keep yourself informed about what's happening with the markets and you should weather the storm fairly well. And don't let all those tossers at your local bank tell you otherwise!

Lots of calls for severe cuts in the UK.

[BTron]

The BoC is going to cut rates for at least the next year.


Then short interest rate futures? What if the Chinese, Indian or Brazilian economies prove to be more self-sustainable that people anticipated and they're fuelling their internal development and >5% GDP growth rate and are less affected than the rest of the world? And commodity prices get a dead cat bounce and oil and coal and steel increase in value again and the Canadian economy benefits?

You can't make blanket statements like that, no one actually knows.

[ShopSmart]

I can't believe people are talking like they know exactly how interest rates will be in the near or long term.

I'm shocked.

[Newbieinvestor]

Then short interest rate futures? What if the Chinese, Indian or Brazilian economies prove to be more self-sustainable that people anticipated and they're fuelling their internal development and >5% GDP growth rate and are less affected than the rest of the world? And commodity prices get a dead cat bounce and oil and coal and steel increase in value again and the Canadian economy benefits?

You can't make blanket statements like that, no one actually knows.
How does India look today?

And China relies heavily on the US market. Have you checked the Chinese stock markets recently?

I am confident that rates will continue their trend.

Going for P -8 in August has turned out pretty well:)

[Thalo]

How does India look today?




Eh, I think their financial capital is kinda experiencing its own 9/11 right now as we speak. Can't be good for their stock markets. >:(

http://www.theglobeandmail.com/servlet/story/RTGAM.20081126.wmumbai1127/BNStory/International/home

[Newbieinvestor]

Eh, I think their financial capital is kinda experiencing its own 9/11 right now as we speak. Can't be good for their stock markets. >:(

http://www.theglobeandmail.com/servlet/story/RTGAM.20081126.wmumbai1127/BNStory/International/home

Yep.

[pitz]

Recession = mortgage rates go higher as other sectors of the economy, in particular, businesses and government, place greater demands on the capital markets for financing.

Just open up a newspaper these days and see all the perfectly good businesses that can't obtain credit on favourable terms. Policy target rates may come down, but spreads will increase, especially on over-invested asset classes such as mortgages.

On the totem pole of lending, typically mortgages and other consumer credit are amongst the lowest. Businesses haven't needed loans in the past 5-8 years, because of high profitability, and a lack of investment -- so plenty of money was available to finance mortgages, pushing rates down. Now the cycle is turning.

[gizmo8]

"Recession = mortgage rates go higher as other sectors of the economy, in particular, businesses and government, place greater demands on the capital markets for financing."

wrong,the Canadian government is buying billions of the banks mortgages to offer liquidity to the markets,in a recession why would they raise rates where deflation is a strong possibility and your trying to stimulate a economy and not slow it down.If you have a good credit rating you will get lower rates.

J

[spaghettifreddy]

Recession = mortgage rates go higher as other sectors of the economy, in particular, businesses and government, place greater demands on the capital markets for financing.

I'm extremely puzzled by your motives. Really. Your replies are so far off to the extreme that I come to a screeching halt and ask WHAT?

If the economy is or is heading into a recession, and everyone is counting their pennies and not spending, why would the governments and banks make it harder to access money?

Doesn't it make sense that when no one is spending that reducing rates will encourage people to spend money, thus getting the economy moving again?

Since you are so sure that the mortgage rates are going higher, tell me when do you think they will go higher? In the short term (next 6 months), next 1 year, next 2 years, or much longer in the next 3 -5 years?

Most sensible people usually eliminate the extreme opinions. While some folks will read your response and be shocked or scared, I'm fairly sure most will not take your advice to heart. I'm just extremely curious as to what event occurred that motivates you to post these kinds of extreme ideas.

In any case, have a nice life. :lol:

[pitz]

I'm extremely puzzled by your motives. Really. Your replies are so far off to the extreme that I come to a screeching halt and ask WHAT?


What's so extreme about businesses, that provide jobs and economic activity, having preferential access to credit?

I think North American society, in general, has a massive attitude adjustment ahead of themselves insofar as being able to obtain housing-backed credit.


If the economy is or is heading into a recession, and everyone is counting their pennies and not spending, why would the governments and banks make it harder to access money?


Because they have better opportunities to invest their money, in industrial projects, in infrastructure, in research and development, instead of investing in residential real estate loans (a sector that suffers from excess capacity).

Making a loan to drill an oil well will, in the long run, generate much more economic activity, than making a loan to build an empty condominium building.

When money is tight, capital is rationed.


Doesn't it make sense that when no one is spending that reducing rates will encourage people to spend money, thus getting the economy moving again?


Lending and borrowing is a consensual transactions between borrower and lender. Without the wage growth that is made possible through re-industrialization, why would lenders have any confidence in repayment? Building a modern factory, refinery, or mine, offers some prospect for repayment. Lending money to a bunch of unemployed people doesn't.


Since you are so sure that the mortgage rates are going higher, tell me when do you think they will go higher? In the short term (next 6 months), next 1 year, next 2 years, or much longer in the next 3 -5 years?


I don't have a crystal ball. But rates are already historically very low.


Most sensible people usually eliminate the extreme opinions. While some folks will read your response and be shocked or scared, I'm


"extreme opinion"? I'm the only person who has said 'higher', what's so 'extreme' about that?


fairly sure most will not take your advice to heart. I'm just extremely curious as to what event occurred that motivates you to post these kinds of extreme ideas.


Your entire post is pretty bizarre. Consumers are the most over-lent to participants in the economy, by far. The economy is off track, ostensibly, because of excess mal-investment in residential real estate, and underinvestment in, among other things, industry and infrastructure. Historically, assets that are in excess in an economy lose most of their value, and since housing is in excess (several million vacant homes in the USA), it would logically follow...

[gizmo8]

Pitz the small businesses is the heart and soul of the economy,your definition of large companies getting us out of a recession was the 60's economic blueprints,its the large businesses that is creating the recessionary downturn.If you think by restricting access to fluid credit for the everyday borrowers is the way to spend the way out of this recession I really hate to use you as financial adviser because the stimulus package is aimed at small borrowers.

[gomyone]

Yes Pitz is confused and I would take anything he says with a grain of salt because there is a fair bit of emotion in many of his responses rather than fact.

here are some FACTS: The availablility of credit is definitely tougher today. Its much harder to get a loan because lending institutions are heavily scrutinizing borrowers. So Pitz is right, not everyone will just get credit.

However what Pitz doesn't understand is that the cost of consumer and business credit is determined by the spreads lending institutions get in the capital markets. Yes spreads are very wide right now - reflecting the capital hoarding that Pitz might be referring too. But what Pitz doesn't understand is that fixed income yields (the floor for effective borrowing costs) are also very low (in fact at record lows). This is partly because financial markets are operating under the assumption of deflation taking hold. That means that even in spite of spreads being very wide, effective borrowing rates remain low because interest rates are so much lower too. In fact, in deflation-plagued Japan, interest rates have been effectively 0% for nearly a decade. The problem there is nobody is borrowing (a demand problem created by a supply problem)

This is all to say that mortgage rates are and should remain at historically low levels in the current environment because that's what central banks want. This is not to say that everyone will get those low rate loans very easily. And perhaps down the road concerns of inflation might again rear its ugly head and push up interest rates and put mortgage rates up to the levels that Pitz thinks is around the corner. But unless you believe inflation is a major problem, then that's a long way off.

[gizmo8]

totally agree.....with gas price this low and the OPEC trying anything to stabilize the price even thought they have a record surplus I doubt within the next two quarters interest rates will rise.Only those who a amazing credit scores will get the lowest rates and those who are trying to buy their first home with below average scores might be squeezed out of the market.Knock on wood condos prices did rise %2.5 in the city core so hopefully the real estate market will lead us out of the recession.Gas and food prices was the main inflationary cycles that drove interest rates the last two years,with those items actually showing signs of weakness the fear of interest rate hikes is insane in this economy.

[NuclearBlast]

so hopefully the real estate market will lead us out of the recession.
:lol: Well, having in mind that it was exactly the real estate market that started the recession in US and is a big contributor to the (technical) recession in Canada, I find your statement very cute.

[pitz]

Yes Pitz is confused and I would take anything he says with a grain of salt because there is a fair bit of emotion in many of his responses rather than fact.


Emotion? Where?



here are some FACTS: The availablility of credit is definitely tougher today. Its much harder to get a loan because lending institutions are heavily scrutinizing borrowers. So Pitz is right, not everyone will just get credit.


...and those that do manage to obtain credit, will be paying higher costs for that credit.


However what Pitz doesn't understand is that the cost of consumer and business credit is determined by the spreads lending institutions get in the capital markets. Yes spreads are very wide right now - reflecting the capital hoarding that Pitz might be referring too.


Is it hoarding, or is it merely a case of savers and lenders wanting to redirect their capital towards sectors of the economy that are the most efficient and productive users of that capital?

As I asked above, do you think that lending money to build empty condos makes any sense?


But what Pitz doesn't understand is that fixed income yields (the floor for effective borrowing costs) are also very low (in fact at record lows).


I understand that perfectly. I said in my earlier response, that *spreads* would widen, and continue to widen against those 'risk-free' rates, and, for short term loans, against policy target rates.


This is all to say that mortgage rates are and should remain at historically low levels in the current environment because that's what central banks want.


Do central banks really want low interest rates for mortgage borrowers, or do they want to lower interest rates for the sectors of the economy that are most productive?

Mortgages compete for investment dollars with other asset classes. The housing market is so physically over-built that the performance of mortgages going forward can't possibly be good, and significant defaults are likely. Other asset classes are significantly under-invested.

Another way of looking at the problem -- the savings rates of Canadian households are essentially zero or negative. Businesses, on the other hand, have had excellent earnings in the past 4 years, and have kept much of those savings in financial assets instead of re-investing in their businesses. As those earnings fall, there are less earnings to invest in financial assets and hence, interest rates will go higher as less money flows into the capital markets from business activity.

[gomyone]

Emotion? Where?

Well, right there!

...and those that do manage to obtain credit, will be paying higher costs for that credit.

Relative to when? Yesterday, 2006, 2002, 1993?? If you open the Globe to page B7 today you'll see the posted five year fixed rate is at 6.45% - with discounts you might get 6% - this rate is actually lower than any rate you ever got over the 70s, 80s and 1990s and for that matter late last year.

Is it hoarding, or is it merely a case of savers and lenders wanting to redirect their capital towards sectors of the economy that are the most efficient and productive users of that capital?

As I asked above, do you think that lending money to build empty condos makes any sense?

Lenders will direct capital wherever they get the best returns. Depending on loan covenants they can still make money in residential real estate if they chose to. They can also lose plenty of money in some of the "highly productive" areas of the economy that you mentioned (although based on current sectoral studies oil sands development is not actually as productive as you think.)

Do central banks really want low interest rates for mortgage borrowers, or do they want to lower interest rates for the sectors of the economy that are most productive?

Unless you live in China, the central bank cannot dictate to private institutions whom to lend to. All they can do is provide the mechanisms in which to lend. The lending institutions take it from there.

Mortgages compete for investment dollars with other asset classes. The housing market is so physically over-built that the performance of mortgages going forward can't possibly be good, and significant defaults are likely. Other asset classes are significantly under-invested.

That may be true for residential real estate in the aggregate, but how much overvalued and how much of a credit risk depends on what criteria the lender puts on each individual deal and who the borrower is. The percentage of equity in residential real estate for all homeowners in this country is 70% and that percentage for all mortgage holders is 50% - these potential borrowers would likely have good convenants even if home prices fell 30% so there is still money to be made from these people.

As those earnings fall, there are less earnings to invest in financial assets and hence, interest rates will go higher as less money flows into the capital markets from business activity.

Huh? Read a finance textbook - that is not the only, nor the most influential determinant of interest rates.

Right now, there is a flight to safety. All the capital that is leaving the stock market is flooding the safety of the bond market pushing interest rates exceptionally lower. Prior to that, interest rates failed to rise much higher even when central banks were pushing up short term interest rates partly because an excess of savings globally was flowing into US Treasuries. Maybe in the long term, that will no longer happpen but for now global capital is flowing into the safety of bonds - that keeps interest rates low.

BTW, I think the biggest risk today as a consequence of this environment is that these low rates, particularly in the US, will fail to cause an increase in growth because of morbid demand. This could result in a Japanese style liquidity trap leaving us with 0% interest rates for a very long time. The key will be to prevent asset deflation.

[rocking23nf]

personally, I would lock in to a long term 5 year rate at 5% or lower if give the option, Sure you may find cheaper, but I consider 5% interest on my mortgage a reasonable rate to pay the bank for loaning me the money.

who knows, in 2 years we could be looking at 10% interest rate, or we could be looking at 2% interest rate. Personally, im happy with paying 5%, if I could lock in at 20 years @ 5%, I would jump all over it.

just my 2 cents.

[pitz]

Relative to when? Yesterday, 2006, 2002, 1993?? If you open the Globe to page B7 today you'll see the posted five year fixed rate is at 6.45% - with discounts you might get 6% - this rate is actually lower than any rate you ever got over the 70s, 80s and 1990s and for that matter late last year.


True. If you look at the Bank of Canada website, and the mortgage rate tables, you'll see that rates were very low in the 1950s and 1960s as well (like today), but rose precipitously during the 1970s and remained high throughout the 80s and even the mid 1990s.

The credit markets, by not being willing to place good bids beneath mortgage backed securities, is also implicitly signalling higher interest rates.

Seems that when long-term interest rates on mortgages go lower -- everyone throws a party and celebrates a new era of prosperity. When long-term interest rates on mortgages go higher, everyone is screaming mad and calls it a 'credit crisis'.


Unless you live in China, the central bank cannot dictate to private institutions whom to lend to. All they can do is provide the mechanisms in which to lend. The lending institutions take it from there.


Exactly! And let's assume the economy does reflate over the next few months. We'll be right back at $150 oil, $1000 gold, and $4 copper -- maybe even higher, with all the infrastructure spending, but there will still be a glut of empty houses and condos sitting out there.

Where do you think the investment money will go?


The percentage of equity in residential real estate for all homeowners in this country is 70% and that percentage for all mortgage holders is 50% - these potential borrowers would likely have good convenants even if home prices fell 30% so there is still money to be made from these people.


Sure, the Canadian market is somewhat more fundamentally solid than that of the US. I don't disagree. The lows weren't as low, and the highs won't be as high.


Huh? Read a finance textbook - that is not the only, nor the most influential determinant of interest rates.


Its a huge factor. The economy was quite poor at various points during the 1970s, and interest rates on mortgages spiked quite severely during the recessions then, accompanied by strong dollar devaluation, either explicitly (ie: Nixon removing the US dollar from gold convertibility), or implicitly (oil, gold and inflation spiking severely in 1977-1980).


Right now, there is a flight to safety. All the capital that is leaving the stock market is flooding the safety of the bond market pushing interest rates exceptionally lower.


What I see is people selling corporate bonds, mortgage bonds, and stocks, and buying government bonds. They're not buying mortgage bonds, that's why governments on both sides of the border have been desperately trying to facilitate markets in mortgages at inflated prices (ie: unrealistically low interest rates). We wouldn't be in this mess if there was solid buying of mortgage backed securities.


Prior to that, interest rates failed to rise much higher even when central banks were pushing up short term interest rates partly because an excess of savings globally was flowing into US Treasuries.


That mechamism only works when the USA exports enough dollars (ie: imports enough stuff) so that foreigners can buy those bonds. In case you haven't heard, US imports have fallen off a cliff, oil prices have declined by 2/3rds, and OPEC nations have much more robust internal economies that are addicted to high oil prices. If anything, they'll start demanding that their US Treasuries be repaid (to support their own economies), not accelerate their buying with their non-existent cash.


Maybe in the long term, that will no longer happpen but for now global capital is flowing into the safety of bonds - that keeps interest rates low.


Only certain types of interest rates, on the highest quality of debt possible. Mortgage bonds are most certainly not seeing that benefit, and likely won't, because the underlying collateral is in excess and is rapidly losing value.


BTW, I think the biggest risk today as a consequence of this environment is that these low rates, particularly in the US, will fail to cause an increase in growth because of morbid demand.


The US has major room to grow its export capacity, and growth in exports (financed in preference to mortgage financing) should be able to displace much of the economy that is currently devoted to consumption and credit intermediation activities (they say the US consumer is 70% of the economy -- I'd expect that to drop to 20-30% in the coming years).

So, basically, good times ahead for scientific and technical professionals, industrial tradespeople, and anyone with the skills to turn the US into a science, engineering, and manufacturing powerhouse. Bad times ahead for almost everyone else. Not to inject emotion here, but the result of this crisis will be a once-in-a-generation revaluation of human capital. If you want to be rich in the future, become an engineer, scientist, industrial tradesperson, not a banker, accountant, or lawyer.


This could result in a Japanese style liquidity trap leaving us with 0% interest rates for a very long time. The key will be to prevent asset deflation.

And that is accomplished by getting everyone in the economy working, and working to the best of their skills.

[i6s1]

Good discussion. Every time I read one of Pitz' posts, I learn something new. I think he's got a point, as usual.

[gomyone]

True. If you look at the Bank of Canada website, and the mortgage rate tables, you'll see that rates were very low in the 1950s and 1960s as well (like today), but rose precipitously during the 1970s and remained high throughout the 80s and even the mid 1990s.

The major factor that drove interest rates up in the 1970s was inflation. We have the opposite problem today

The credit markets, by not being willing to place good bids beneath mortgage backed securities, is also implicitly signalling higher interest rates.

You need to realize that less than 20% of mortgages in Canada are securitized. Certainly increased securitization can help lower funding costs (its why the gov't recently took mortgages off the books of the banks) and it can help lower mortgage rates. But it most certainly doesn't determine interest rates.

Exactly! And let's assume the economy does reflate over the next few months. We'll be right back at $150 oil, $1000 gold, and $4 copper -- maybe even higher, with all the infrastructure spending, but there will still be a glut of empty houses and condos sitting out there.

Where do you think the investment money will go?

Agreed. But the key question is whether ther economy does in fact reflate. Right now there is excess capacity across the board and yes, there will be excess capacity in the housing market as well if not already. Where does the money go? To the safety of bond markets, hence low interest rates.

Its a huge factor. The economy was quite poor at various points during the 1970s, and interest rates on mortgages spiked quite severely during the recessions then, accompanied by strong dollar devaluation, either explicitly (ie: Nixon removing the US dollar from gold convertibility), or implicitly (oil, gold and inflation spiking severely in 1977-1980).

I think you are confused. A weak economy in the 70s didn't send interest rates higher - inflation sent it higher. Yes a weaker dollar will cause inflation, but the US dollar has actually strengthened recently - yet another reason why deflation is a big threat today.

What I see is people selling corporate bonds, mortgage bonds, and stocks, and buying government bonds.

Exactly, that pushes interest rates lower.

They're not buying mortgage bonds, that's why governments on both sides of the border have been desperately trying to facilitate markets in mortgages at inflated prices (ie: unrealistically low interest rates). We wouldn't be in this mess if there was solid buying of mortgage backed securities.

Again, securitized mortgage market is very small in Canada and most loans are originated on the nooks of the banks. But that is besides the point - yes funding costs have gone up significantly for lending institutions, but thankfully interest rates are low - if they went up too we'd definitely see double digit mortgage rates - that is not the case nor will it be for a long time to come.

So, basically, good times ahead for scientific and technical professionals, industrial tradespeople, and anyone with the skills to turn the US into a science, engineering, and manufacturing powerhouse. Bad times ahead for almost everyone else. Not to inject emotion here, but the result of this crisis will be a once-in-a-generation revaluation of human capital. If you want to be rich in the future, become an engineer, scientist, industrial tradesperson, not a banker, accountant, or lawyer.

I'd agree with this insofar as the major deleveraging that is going on now will result in smaller share of the credit intermediation sector in the economy implying the need for far fewer investment bankers. However I don't think this necessarily implies that engineers or scientists will be rich!

[Newbieinvestor]

Yes Pitz is confused and I would take anything he says with a grain of salt because there is a fair bit of emotion in many of his responses rather than fact..
Right on.

[Spidey]

I really wish i went for a vairable with my mortgage. I had it with our old one and did really well at .75% below prime. But with out new house the mortgage was a lot more, so I was worried if interest rates did go up we would really be screwed. Our old house it wasnt that much of an issue as the mortgage was lower.

I still got a pretty good rate, but I would be saving a ton in interest if I was even at prime right now

[Newbieinvestor]

I really wish i went for a vairable with my mortgage. I had it with our old one and did really well at .75% below prime. But with out new house the mortgage was a lot more, so I was worried if interest rates did go up we would really be screwed. Our old house it wasnt that much of an issue as the mortgage was lower.

I still got a pretty good rate, but I would be saving a ton in interest if I was even at prime right now
Many are in the same boat.

However, high oil and the US sub-prime mess was indicator an economic blowup last summer which indicated that rates would go down significantly.

The blowup happened quicker than I thought (I was thinking late winter for the US)

I think Canada is going to truly suffer from a severe recession next year and in 2010 and we don't 'really' feel it yet.

Manufacturing hit hard. No more $100+ oil. Commodities down. What's left? Mcquinty can't hire everyone to work as a bureaucrat and vote Liberal.

Thus, low rates for a long time.

[luckydog2006]

Just to throw more fuel to the fire.

Seems like the Obama administration is possibly moving towards higher interest rates. The appointment of Paul Volcker (look up Wiki) and you'll notice that this person had the experience of handling a similar issue back in the 80's by executing rapid interest rate increases to combat recession, inflation etc. Wasn't much liked as well because of that but it was effective.

NY Times
see link (http://topics.nytimes.com/top/reference/timestopics/people/v/paul_a_volcker/index.html?inline=nyt-per)

Wiki
see link2 (http://en.wikipedia.org/wiki/Paul_Volcker)

see link3 (http://www.buyandhold.com/bh/en/education/history/2000/paul_volker2.html)


IMO, after seeing who is being brought in by the US to handle this crisis, I believe the interest rates will go much higher next year when the Obama administration is inaugurated. Only the next 6+ months will tell. Batten down the hatches ...

[Spidey]

Many are in the same boat.

However, high oil and the US sub-prime mess was indicator an economic blowup last summer which indicated that rates would go down significantly.

The blowup happened quicker than I thought (I was thinking late winter for the US)

I think Canada is going to truly suffer from a severe recession next year and in 2010 and we don't 'really' feel it yet.

Manufacturing hit hard. No more $100+ oil. Commodities down. What's left? Mcquinty can't hire everyone to work as a bureaucrat and vote Liberal.

Thus, low rates for a long time.

I was actually on the fence about sticking wtih variable, but going with the biggest mortgage I ever had, I decided to go the other route.

But then again with this stuff, nothings set in stone and no ones a future teller. But 2% difference on my mortgage would go a long way right now.

Even on this forum, 50% of the people say one thing about the economy, the other 50% the opposite (as an example) You do what you think is best after research, what more can you do

[i6s1]

Just to throw more fuel to the fire.

Seems like the Obama administration is possibly moving towards higher interest rates. The appointment of Paul Volcker (look up Wiki) and you'll notice that this person had the experience of handling a similar issue back in the 80's by executing rapid interest rate increases to combat recession, inflation etc. Wasn't much liked as well because of that but it was effective.

NY Times
see link (http://topics.nytimes.com/top/reference/timestopics/people/v/paul_a_volcker/index.html?inline=nyt-per)

Wiki
see link2 (http://en.wikipedia.org/wiki/Paul_Volcker)

see link3 (http://www.buyandhold.com/bh/en/education/history/2000/paul_volker2.html)


IMO, after seeing who is being brought in by the US to handle this crisis, I believe the interest rates will go much higher next year when the Obama administration is inaugurated. Only the next 6+ months will tell. Batten down the hatches ...

Well, he increased rates to fight inflation because he (and Regan) was willing to cause a recession. I doubt very much that Obama's got balls like Regan. And inflation now isn't anywhere near as bad as it is then.

[pitz]

The major factor that drove interest rates up in the 1970s was inflation. We have the opposite problem today


Yeah its kind of hard to tell what's really going on. Assets seem to be deflating hard, but the consumer price index is still running well over the 2% target. But the stage is set for heavy inflation in the years to come, as collapsing production and imports today must be ameliorated in the future.

I don't have all the answers, or even any answers. I do think that there are many scenarios that do call for strong inflation in years to come. But I'm just as lost as anyone else right now to offer advice, other than to buy quality investments, minimize fees, save a good chunk of your income, and don't borrow for consumption.


You need to realize that less than 20% of mortgages in Canada are securitized. Certainly increased securitization can help lower funding costs (its why the gov't recently took mortgages off the books of the banks) and it can help lower mortgage rates. But it most certainly doesn't determine interest rates.


Securitization, and the prices at which those securitized MBS packages trade, are proxies for the prices of non-securitized mortgages. A bank may not be required, for capital adequacy purposes, mark their non-securitized holdings to market, but a bank would be foolish to originate loans at rates below what they could buy securitized assets for on the market, and conversely, if a bank can securitize and sell their book of mortgages for greater than its book value, they'd be stupid not to.

Hence, there is a relative state of equilibrium between the value of bank balance sheet assets, and securitized assets. Valuations on the two will not remain divorced for very long without a bank taking advantage of the arbitrage opportunity.


I think you are confused. A weak economy in the 70s didn't send interest rates higher - inflation sent it higher. Yes a weaker dollar will cause


And what causes inflation? Excess demand, and/or deficient supply. Supply was weak because of under-investment in the 1960s. Demand was strong because the baby boomers were getting their first houses/cars.

The result then was that interest rates rose to ration consumption of consumer goods, while capital formation was expended on capital goods and technology.

A similar situation exists today. Supply is weak because most manufacturing has been sent overseas (especially in energy). Demand is strong because the children of the baby boomers are buying houses and cars. That gives us inflation again, does it not?


I'd agree with this insofar as the major deleveraging that is going on now will result in smaller share of the credit intermediation sector


One result of deleveraging is that a financial interrmediator will require much higher spreads to sustain their business. Obviously some will go out of business, but at 20X leverage, a 0.5% spread earns a 10% profit (over and above the cost of equity).

At 5X leverage, to earn the same profit requires a 2.5% spread.

Again, this pushes up mortgage rates because not only will market participants dissappear, but the ones that do remain will want to be compensated more for the risk. Because the stock market has collapsed, the cost of that equity capital is also dramatically higher.

[Newbieinvestor]

Even on this forum, 50% of the people say one thing about the economy, the other 50% the opposite (as an example) You do what you think is best after research, what more can you do
On some forums you can find someone who has a track record on certain things and is very helpful (ie angel_wing for credit cards.)

I figured that oil would drop and that it was just another bubble where speculators were trying to milk it during the final year of the Bush "mis-" administration.

I also suspected a US blow up. It happened quicker than I thought.

Canada is in for a very hard time that could make 91-94 seem like happy times.

Have you calculated the cost of paying a penalty and going for a variable product?

I have a friend on another forum who broke 4 mortgages in the summer, paying the penalty and is now at 3.1% for each and will earn his money back in a few more months. Then it's just gravy......

PM me if you want to chat.

[Newbieinvestor]

But the stage is set for heavy inflation in the years to come, as collapsing production and imports today must be ameliorated in the future.
.
No, it's not. Here comes your built-in bias again.

We "could" have inflation. However, the stage is set for low inflation and perhaps deflation.

[gomyone]

No, it's not. Here comes your built-in bias again.

We "could" have inflation. However, the stage is set for low inflation and perhaps deflation.

Yes, it seems like Pitz hasn't seen the recent inflation numbers so he injected some personal bias - in actuality there were some pretty heavy declines in several sectors in both Canada in the US - and that was just for October. Pretty clear that deflation - not inflation is the biggest concern right now. Also why the central banks are slashing interest rates dramatically.

I don't have all the answers, or even any answers. I do think that there are many scenarios that do call for strong inflation in years to come.

Not sure how you can realistically get inflation in this environment. If you are suggesting that it could happen because central banks are jacking up the money supply and government are borrowing heavily then you also have to realize that you need a major ramp up in the velocity of money in order for prices to go up. By your own admission, transactional activity (ie., the velocity of money) is stuck in a rut. This is not my personal bias on the outlook for inflation - its based on the quantity theory of money.

Bottom line, the OP should not expect a material rise in interest or mortgage rates for quite some time. What he should expect is that its going to be damn hard to get good terms on any loan for quite some time. You definitely don't want to have any indications that you are potential credit risk.

[gomyone]

I really wish i went for a vairable with my mortgage. I had it with our old one and did really well at .75% below prime. But with out new house the mortgage was a lot more, so I was worried if interest rates did go up we would really be screwed. Our old house it wasnt that much of an issue as the mortgage was lower.

I still got a pretty good rate, but I would be saving a ton in interest if I was even at prime right now

..why not set a variable rate payment to the higher fixed rate. That way, you cover yourself on the upside but you also get the savings from potentially lower rates too. For about 75% of the time thru history the best option has been a variable rate mortgage. That's because yield curves almost always slope upward.

[Spidey]

..why not set a variable rate payment to the higher fixed rate. That way, you cover yourself on the upside but you also get the savings from potentially lower rates too. For about 75% of the time thru history the best option has been a variable rate mortgage. That's because yield curves almost always slope upward.

Wouldnt I have to redo my mortgage to do that, and then get hit with a penalty before the 5 years are up

[Spidey]

On some forums you can find someone who has a track record on certain things and is very helpful (ie angel_wing for credit cards.)

I figured that oil would drop and that it was just another bubble where speculators were trying to milk it during the final year of the Bush "mis-" administration.

I also suspected a US blow up. It happened quicker than I thought.

Canada is in for a very hard time that could make 91-94 seem like happy times.

Have you calculated the cost of paying a penalty and going for a variable product?

I have a friend on another forum who broke 4 mortgages in the summer, paying the penalty and is now at 3.1% for each and will earn his money back in a few more months. Then it's just gravy......

PM me if you want to chat.

See you suspected, but didnt know 100%. What if you were wrong, then what.

I didnt care what was goin on 91-94 I just graduated from high school in 90, so markets and mortgages were the furthest thing from my mind.

The penalyt on my mortgage Im sure will be pretty biug, anf the variable rates I see are anything like I used to have, .75% below prime

I dotn follow markets very closely, sure I keep my eye on prime and the like, but I just dont have the time to worry about everyhing. Something in life has got give, this is one thing for me. Is that good or bad, no idea, but a preson cant be fluent in every thing in life

[luckydog2006]

Well, he increased rates to fight inflation because he (and Regan) was willing to cause a recession. I doubt very much that Obama's got balls like Regan. And inflation now isn't anywhere near as bad as it is then.

I think what we have now is in-between inflation and stagnation -=> stagflation.

see link (http://en.wikipedia.org/wiki/Stagflation)

[gomyone]

I think what we have now is in-between inflation and stagnation -=> stagflation.

see link (http://en.wikipedia.org/wiki/Stagflation)

THere is no stagflation - that was what the media was all getting their knickers in a twist about earlier this year when oil was exploding. Not so anymore, today its all about falling prices. Go to the US sometime and see the kind of price discounting going on there. Hell just walk up to a new car dealer here (especially a domestic) and see what kind of deals are available.

Oh yeah, and just because Obama has Volker in his administration doesn't mean interest rates suddenly start rising. That is determined by the Fed not the presidential CEA. And the Fed doesn't just arbitrarily set rates higher or lower. Rates are set based on the expectation of excess or surplus capacity in the economy. Unless you are living in a dream world, there is huge amounts of excess capacity milling about - that means lower interest rates.

[gomyone]

Wouldnt I have to redo my mortgage to do that, and then get hit with a penalty before the 5 years are up

...don't bother doing it now. if your mortgage is quite large the potential savings you might get from going variable will just be more than offset by the penalties.

[Newbieinvestor]

Here comes pitz's latest figures showing a booming economy and huge inflation on the way!

The Associated Press

November 27, 2008 at 1:56 PM EST

WASHINGTON — The full scope of the U.S. housing meltdown isn't clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts across the country.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure.

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.

[pitz]

Here comes pitz's latest figures showing a booming economy and huge inflation on the way!

I didn't say anything about booming economy. Did you even bother reading a word I said? I said that investors in mortgages are going to demand increasingly higher spreads (over risk-free rates) to account for the much greater *risk* involved in lending.

Your quoted article implies precisely that.

If the world ran on your logic, the least creditworthy borrowers would get the lowest interest rates, and the most creditworthy would be paying the highest interest rates. Sorry, but it doesn't work that way. Nobody will be getting cheap loans to buy those shopping malls, and I've laid out the reasons why nobody will be getting cheap loans to buy (or refinance) houses either.

Interest rates on loans to consumers, including housing back loans (mortgages, HELOCs, etc.) are now more risky than ever. People are losing their jobs. Market valuations are dropping rapidly almost everywhere. Households, for many years, haven't been accumulating any savings. Investment portfolios are decimated. Banks are experiencing defaults on existing loans. And you think that in light of these circumstances, that lending to consumers is less risky than before??? You think that lenders are going to fight each other to win the prize of determining who can lose the most money?

[Newbieinvestor]

the stage is set for heavy inflation in the years to come.

:!:

[pitz]

:!:

Zimbawbwe has hyperinflation, but not exactly what you'd call a 'booming economy'.

The Weimar Republic (post WW1 Germany, before the rise of Hitler) had a terrible economy, coupled with hyperinflation.

I didn't say 'booming economy' either. "stagflation" is probably the best way to describe it, although certain sectors will do better than others.