Interview with Odlum Brown Strategist on whats to come from interest rates

If you haven't had enough opinions offered or articles about what to expect in the coming months and years, here's some great points from Hank Cunningham, Fixed Income Strategist for Odlum Brown with over 40 years experience.

These excerpts are from Canadian Mortgage Trends http://www.canadianmortgagetrends.com/
an invaluable resource for what's going on in the mortgage world!

On long-term interest rates…

Hank: I don’t see much upward pressure on rates—not in the developed world. There’s no inflation to speak of. In fact, inflation continues to recede in most places if anything.

On the European debt crisis…

Hank: The sovereign debt issue is a major problem, but it’s confined to a part of the globe where it’s not going to have a material impact on the rest of the world. Certainly not from a growth point of view.

On long-term rates one year from now…

Hank: You’re going to see a flatter yield curve looking out a year. The spread between a 1-year mortgage and a 5-year mortgage is going to be a lot narrower. The yield curve is still steep right now. I think (mortgage) clients are still better off floating than they are fixing.

One of the other things you have to think about is the amount of debt coming due by governments. The U.S. has 40% of its debt maturing in the next three years. They don’t want higher inflation and interest rates.

On inflation risk…

Hank: Inflation is just under 2% in Canada. In the U.S. it's under 1% actually.

The 5-year rate might go up a bit, but the market will get anticipatory (and discount the Bank of Canada’s future rate increases)…and then, longer-term yields should come back down. People tend to underestimate the discounting nature of the market.

Note: I have removed a great technical analysis of effect bond yields to save some of you from getting too detailed, if you'd like to read more http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/06/1-on-1-with-hank-cunningham.html

On economists’ forecasts of the Bank of Canada…

Hank: Economists generally do straight line forecasting. They don’t allow a lot of room for (unexpected) changes in the marketplace. Rate forecasts depend on your view of the world. My view of the world is one of growth with very little inflation. In that scenario there is no need for serious tightening. Market rates will rise if the demand for money rises. The market really acts independently from the Bank of Canada, as you know.

On where we go from here…

Hank: The BoC has already indicated that rates are going up. It (the hike in June) won’t be the last increase in the Bank rate. You’re going to see a flatter yield curve for sure.
The banks have been funding longer-term mortgages with short-term money. They pay nothing on savings and charge 4% for a mortgage. It’s been easy arbitrage. In 12-18 months that will be over.
In the meantime, people with mortgages will be “forced” to fix at the wrong time, right before rates come back down again. It happens, and it’s going to happen again. We’ve already had one false move in rates.

On going fixed or variable…

Hank: Money has been cheap. If people have fear of rates rising, you can fix right now and still have cheap money. I have no problem recommending that. But if you’re playing it close to the chest, I would stay floating right now.

Have a great weekend!

Peter McKinnon
http://www.peterlmckinnon.com/
peter_mckinnon@centum.ca

Housing Prices to fall in 2011??

I have had more than a few clients asking me about the recent studies released by the Canadian Real Estate Association (CREA) indicating a 3.5% decrease in the price of homes in BC by the end of 2011.

Should I wait to buy? I am asked.

Well, the same report predicts an increase of 2.3% for the balance of 2010. Assuming that there is no margin of error in these "studies" that would indicate a net decrease of approximately 1.2% if you were to wait for the next 18 months to make your purchase.

Lets do some common sense math. If I was to purchase the average Vancouver home at approx $700,000, a 1.2% savings would be $8,400. Nothing to sneeze at by any means! That would cover the land transfer tax on your eventual purchase. But, lets be realistic here.....if you are renting right now waiting to buy, you will undoubtedly spend more than $8,400 over the next 18 months. Also if mortgage rates increase by the predicted 1 -2 % over the same period you could pay $ 6,000 - 12,000 more in mortgage interest (assuming a 10% down payment).

If you are already a homeowner and are thinking of a move, you know how hard it is to time the sell and the buy, without a rental period in between to catch the best conditions of each transaction.

My advice?? If your purchase is for your home, get out with a qualified realtor and get a good deal on what you want....now.

Peter McKinnon, Centum Pacific Mortgages
Vancouver
http://www.peterlmckinnon.com/
peter_mckinnon@centum.ca