Ottawa House for Sale
Economic Update
BOND YIELDS PLUNGE, SPREAD INCREASES TO NEW HIGH

The bond market continues to defy economists’ expectations. The 5-year yield has fallen to 2.30%, well below technical support at 2.40%. Disappointing Canadian GDP, weaker growth in China, and rallying U.S treasuries are just the latest catalysts pushing down yields. The 5-year GoC is now backing to its yield levels from May 2009. More importantly, the spread between discounted 5-year fixed rates and the bond is now 2.09%—a 15-month high. (The 10-year average is 1.25)

Fat spreads means fat profits for lenders. It also means that fixed rates are way higher than they should be, based on the cost of funds.  The last time the 5-year yield was at 2.30%, discounted five-year fixed rates were 3.75%. (The banks’ “special offer” discounted rates are 4.49% today.)

It wouldn’t be a stretch to expect more cuts to fixed rates soon…

HOUSEHOLD CREDIT GROWTH SLOWING IN CANADA

Despite worries about the rise of household debt in Canada, a CIBC World Markets report says the rate of growth has recently slowed down. Economist Benjamin Tal, the report’s author, said it’s a positive thing that the rate of household debt is slowing. He said the rate at which it grew during the recession and the early stages of the recovery were beyond what was healthy in the long term. “That’s fine,” he said of the previous growth in debt, which helped mitigate effects of the recession in Canada. “That’s exactly what the Bank of Canada wanted to do. . . . The Bank of Canada cut interest rates during the recession to encourage you and me to go and spend, and that’s how you get out of recession.”

But the pace of growth in consumer credit is now slowing, said Mr. Tal, who pointed out the rise in Canadians’ credit for the six months ended in March was slower than the expansion of nominal gross domestic product, which includes the effects of inflation, and it’s the first time in more than seven years that’s happened.  The CIBC report said mortgages are expanding at a rate of 0.6% per month, the slowest since 2003. Lines of credit are expanding at less than one per cent on a monthly basis, the most sluggish pace since 2007, it said. It added that the level of direct loans has flattened.  Credit-card balances, the report said, are rising at a “relatively soft rate” of 0.6% year-over-year with the pace not expected to quicken in the near future.

With the economic recovery now on solid footing in Canada, Mr. Tal said it’s positive that the rate at which household debt grows is slowing. He said the recent economic downturn marked the first recession on record in which overall household debt grew. Barring another recession, Mr. Tal said he doesn’t anticipate a reversal of trends in which household debt actually shrinks. But he added it doesn’t have to, because the current trend is sustainable. “Credit is good, credit is OK, credit is a normal thing in a functioning market,” he said. “It’s basically allowing people to purchase for the future using current cash flow to finance it. There’s nothing wrong with it.”

While debt continues to rise faster than income, Tal said what’s more important is that asset levels — which include investments and real estate — are growing at a faster pace than household debt.

Michael Hatch AMP
Mortgage Agent   Lic#M08008114
Integrity Financing – Dominion Lending Centres
Tel: 613.203.2030     Fax: 613.424.2111
Email: info@ottawashometeam.com
Web: www.ottawashometeam.com
 

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