Bank of Canada Maintains Overnight Rate

Once again and as widely expected the Bank of Canada left its overnight rate unchanged at 1% (3% bank prime rate) for a 3rd consecutive meeting. We are seeing the economy recover at a somewhat faster pace that originally anticipated, but the risks are still elevated, due to concerns of the pace of recovery in the EU as well as the continued strength of the Canadian dollar.

Yesterdays decision to decrease the amortization of all insured mortgages to 30 years from 35 also made the decision easy to maintain the overnight rate at 1%.

The BoC projects a 2.4% increase in the economy in 2011 and a 2.8% in 2012, with a full return to capacity a by the end of 2012. The BoC's next fixed rate announcement is only 6 weeks away on March 1st.

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Dept. of Finance Tightens CMHC Mortgage Rules

For the second time in twelve months, the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), a reduction in the maximum refinance percentage from 90% loan-to-value to 85%, and withdrawing CMHC insurance of home equity lines of credit (HELOC).

Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.

In terms of monetary policy, this helps take some pressure off the Bank of Canada (BoC). With all the talk about the non-sustainable pace of household debt accumulation, there was speculation about whether or not the BoC would consider hiking interest rates for reasons not directly related to its inflation-targeting mandate. Such speculation can be put to rest for the time being.

Loonie looks to stay at par with U.S.

Thanks to a sound Fiscal situation in Canada, Finance minister Jim Flaherty says that the Canadian dollar will hover at parity with the U.S. dollar for some time. It makes no sense that the Canadian dollar will go beck to being devalued next to the US dollar for some time, considering the strength of the Canadian Economy.

House Prices expected to rise in 2011

The average house price in Vancouver has hit 1 million dollars, an increase of 9.8% in 2010, and it is expected to rise 3.7% in 2011. Expect sales activity in the lower mainland to be very strong the first half of 2011 due to home buyers taking advantage of the record low interest rates. Click here to read the entire Vancouver Sun article

Bank of Canada Maintains Overnight Rate

As many expected, there were no big surprises in this morning’s Bank of Canada announcement, where maintenance was the name of the game. There are also no changes anticipated for the remainder for 2010, and at least the early part of 2011.

Even though Canada's recovery is proceeding at a moderate pace, although the economic activity in the second half of 2010 appears slightly weaker than the bank projected in its October Monetary Policy Report. The same cannot be said for the sluggish US and European economies, as well as the emerging financial crisis in Ireland. Banks prime rate holds at 3%

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Global troubles bring some good news for Canada: low interest rates

Looks like Canadians may be enjoying the record low interest rates for some time. Since June the Bank of Canada has been trying to normalize the banks overnight rate, they attempted to do this by increasing the overnight rate by .75% this past summer to 1% (3% bank prime rate). The Bank of Canada would like to see the rate increase to around 3.5% (5.5% bank prime rate) which is ideal for a balanced economy, economists believe.

This is now unlikely for some time due to the recent developments of a slower recovery in the US and in Canada, as well as the re-emergence of the European debt crisis.

Look for bank of Canada governor, Mark Carney to hold off hiking rates until at least July 2011. This is good news for most Canadians borrowing money and especially if you have a variable rate mortgage.

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Don't Expect Housing Prices to Drop Dramatically in 2011

Claims that Canada’s housing market is ready to pop are exaggerated, say economists at BMO Nesbitt Burns.

Instead, they say the market can more realistically be labelled “moderately overvalued” based upon a comparison of house prices with personal income. They also note that mortgage servicing costs for “typical” homebuyers are running near the long-term norm of 34%.

“Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur,” economists Earl Sweet and Sal Guatieri wrote in their research report.

They noted, however, that Canadians would have a hard time dealing with a sudden 3% hike in mortgage rates. That would weaken affordability “substantially” and, in turn, drive down demand and home prices.

Click here to read the BMO Nesbitt Burns research report.