A run down of what's going on in the market and the company.

Tuesday, July 19, 2011

BoC Leaves Key Rate Untouched at 1.00%

The Bank of Canada startled no one today by leaving its key lending rate unchanged at 1.00%.

The BoC has been in a holding pattern for almost 10 months now, keeping prime rate at 3.00%—to the benefit of variable-rate mortgage holders.

A Reuters survey of 37 economists conducted prior to this announcement was unanimous in predicting today's rate hold.

All eyes quickly focused on the BoC’s official statement. Analysts say it included more hints of a rate tightening mindset. Here are highlights from that report:

•The BoC said that some monetary stimulus "will be withdrawn." It's previous wording was "(will be) eventually withdrawn."
•"Total CPI inflation is expected to remain above 3 per cent in the near term"
•"Core inflation is slightly firmer than anticipated"
•"Core inflation is now expected to remain around 2 per cent over the projection horizon."
•"High" commodity prices and "persistent excess demand in major emerging-market economies are contributing to broader global inflationary pressures."
•"(Canadian) Household spending remains solid and business investment robust."
•"Financial conditions in Canada remain very stimulative"
•"...the Bank expects growth in Canada to re-accelerate in the second half of 2011."
•Canada's economy will return to "(full) capacity in the middle of 2012."
•"...there are clear risks" posed by the "European sovereign debt crisis"
•Pending continued economic expansion and absorption in "the current material excess supply in the economy...some of the considerable monetary policy stimulus currently in place will be withdrawn."
Despite awakening inflation and growing employment in Canada, economic risks are not dissipating. Those risks include a fragile North American economy, strong loonie and European debt concerns to name a few. These factors combined have pushed back rate hike expectations until late 2011, or even the first half of 2012.

But some, like Citigroup Capital Markets, are still forecasting higher rates by October.

In a report released Monday, Citi analyst Todd Elmer forecasts the BoC will double its key lending rate to 2.00% by the end of the first quarter in 2012. Elmer said current expectations put too much weight on downbeat external factors and underestimate Canada’s consistently buoyant economic performance.

The financial market has thus far disagreed with economists like Elmer.

One proxy for market sentiment is trading in overnight index swaps (OIS). OIS trade based on expectations of interest rate changes. As of yesterday, they weren't fully pricing in a 1/4 point rate hike until May 2012. Those expectations will shift closer to the beginning of 2012 after today's more hawkish tone in the BoC's statement.

BNN analyst, Linda Nazareth, suggests that economists may soon have to adjust their forecasts to keep up with market expectations. Within a month or so, she says economists may take rate hikes "off the table" for 2011.

Three BoC rate meetings remain in 2011. The next interest rate decision will be on Sept. 7.


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Posted by: Steve Huebl and Robert McLister, CMT
Posted on: July 19, 2011
Article Link: http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/07/boc-leaves-key-rate-untouched-at-100.html
Article Web Site: www.canadianmortgagetrends.com

Monday, July 18, 2011

Low rates push Canadian banks to fight for profit

Frugal Canadian customers, low interest rates and stiff competition are putting a squeeze on the profits from loans made by the country’s big banks, a trend that’s likely to persist into 2012.

Canada’s five major banks all reported a drop in net interest margins in their domestic operations last quarter and the slide isn’t expected to reverse any time soon. Banks begin reporting third-quarter results in August.

Net interest margins, or NIMs, are a major component of the billions in profits Canadian banks earn each quarter, so margin trends affect the portfolios of millions of investors.


“What we’re going to see is there will be continued pressure this year,” Bank of Nova Scotia’s head of Canadian banking, Anatol von Hahn, said in an interview. “My guess is the first or second quarter of our bank year — January to April, that period — I think we will see some movement on interest rates and that will help us in terms of getting the NIMs up.”

The net interest margin is the difference between what a bank charge borrowers for loans and pays out to customers on deposits. Typically, banks borrow cheaply at the short end of the yield curve — usually through deposits — and then lend longer-term loans at a higher rate.

Low interest rates traditionally boost bank profits by making loans affordable to to a wider number of customers. But the ultra-low interest rates brought in by the Bank of Canada after the global financial crisis have skewed the equation.

Bankers say low interest rates are encouraging customers to stick with less profitable variable-rate mortgages rather than higher-margin fixed ones. And rates aren’t seen rising soon.

A Reuters survey published on Wednesday found forecasters do not expect the Bank of Canada to raise interest rates until the fourth quarter. The central bank’s target overnight rate is 1 percent, where it has been since last September.

Many banks are now trying to make up in volume what they are losing on the spread.

“Your revenue is your spread times assets, so you try to get more assets,” said Peter Routledge, a bank analyst at National Bank Financial in Toronto.

But growing loans in Canada isn’t easy. There are only five major banks in the country, all with coast-to-coast branch networks and deep and stable customer bases. With few people willing to change banks for their existing needs, lenders are left jostling for a dwindling number of new loans and deposits.

“Consumer lending in Canada is a very competitive environment already, and when there are fewer loans out there to be had, the competition is only going to grow to get those loans,” said Craig Fehr, an analyst at Edward Jones in St. Louis, Missouri.

Whether the banks will try to win customers by offering lower prices via cheaper loans is hotly debated. Canadian banks avoided much of the global financial crisis because they did not follow their U.S. counterparts down the sub-prime lending black hole, and still sound reluctant to go that way.

“Pricing has not been part of our strategy … that’s a dangerous game,” said von Hahn. “You have to be competitive, but we are not ones that compete on price. We also don’t think that that is sustainable.”

That leaves the banks fighting to differentiate themselves with better service, while accepting that stiff competition means margins will remain under pressure until rates rise.

“We continue to have a very competitive environment in Canada and that can certainly affect margins,” Bank of Montreal spokesman Ralph Marranca said in an email. “Going forward we think that margins will continue to have … stable to downward pressure.”

The two largest banks, Royal Bank of Canada and Toronto-Dominion Bank, declined to comment on the outlook for their net interest margins. The two showed the least compression in the second quarter, leading analysts to speculate they either made good bets on yields ahead of time, or simply delayed their pain until the third quarter.

Given domestic margin pressure, some analysts now favor banks with strong international operations or business lines outside of retail banking to make up the softness at home.

“We’ve got a ’buy’ on TD and RBC — they are international banking players, as is Scotiabank, no question,” said Fehr, noting TD’s strong U.S. retail presence and a focus on global wealth management at RBC. Scotiabank is Canada’s most international bank, with operations across Latin America.

Longer term, many think rising interest rates are the best hope, as they could quickly drive Canadians into higher-margin loans.

“There will be a herd mentality,” said Scotiabank’s von Hahn. “If there is a feeling that this is the beginning of the rise, I think we will see it quite quickly. Many of those in variable rates will decide to go into fixed rates and the margins on the fixed rates are a lot more.”

© Thomson Reuters
Reuters Jul 18, 2011 – 8:00 AM ET | Last Updated: Jul 18, 2011 8:49 AM ET
Link: http://business.financialpost.com/2011/07/18/low-rates-push-canadian-banks-to-fight-for-profit/

Tuesday, July 12, 2011

Canada condo boom may avoid crash | Money | Toronto Sun

TORONTO - Canada’s booming condominium market, which has filled the skylines of its biggest cities with cranes and prompted a warning from its central bank, may well avoid the type of crash that has hobbled the industry in the past.

While inventories of unsold condominiums are trading well above historically averages, industry executives and analysts say demographics, immigration and limited land in the biggest markets all provide long-term support.

With C$500,000 ($515,464) fixer-upper homes out of reach for many Vancouver and Toronto home buyers, condos also remain their only route to property ownership.

“I get asked with all those cranes in the sky, is there going to be a glut of supply? But if you look at the city planners’ projections for demand versus projects on stream, we still don’t have enough condominium projects underway in our big cities,” said Phil Soper, chief executive of Royal LePage, one of the country’s biggest real estate brokerages.

The condominium boom is part of a broader Canadian housing sector surge that followed the global financial crisis, in sharp contrast to the still struggling U.S. market.

After taking a brief hit, home prices and sales jumped as the Bank of Canada cut borrowing costs to a record low. Canadian banks, which escaped the crisis largely unscathed, were easily able to keep loans flowing.

Data Monday showed Canadian housing starts for June surged well past market expectations. The multiple-unit dwellings category — mainly condominiums — accounted for the majority of starts in urban areas.

Supply is growing. BMO Capital Markets recently noted inventory of completed but unoccupied multi-dwelling units at 12,672 units in May, around historical highs, compared to 4,757 for single-family homes.

Elevated levels of unsold condos were one factor prompting Bank of Canada Governor Mark Carney to warn last month about “the possibility of an overshoot in the condo market in some major cities.”

DEVELOPERS, BANKS LEARN HARD LESSON

But analysts said the building surge reflects changing demographics and evolving cities. In addition to first-time homebuyers, condos have also become popular for retiring baby boomers.

Immigration has also underpinned the rapid build-up. The booming market is concentrated in the heavily populated and pricey cities of Vancouver and Toronto, destinations for many of the more than 200,000 people who move to Canada each year.

Analysts attribute part of the condo boom in Vancouver and Toronto to physical and regulatory land restraints, which have changed the mix of housing to more stacked high-density communities from the traditional single-family home.

“It has shift over the last several years. Now it’s about 50/50, which some people are concerned about. I can’t say I am,” said Robert Hogue, senior economist at Royal Bank of Canada.

“I just see this as a reflection of where our major cities are at in their own life cycle.”

Recent Royal LePage data actually showed the pace of price gains in standard condominiums paled against detached bungalows and two-story homes.

Banks and condo developers, particularly in Toronto, also appear to have learned hard lessons from the 1980s, when many built with insufficient regard for demand and got slammed as interest rates climbed.

Analysts say very few shovels these days break ground until the developer has sold at least 70% of the project and has secured bank financing.

“It’s a very well-disciplined supply-side of the equation,” said George Carras, president of RealNet Canada, which tracks commercial and new home projects.

Carras noted building high density housing is a natural progression for a growing city with limited room to expand outward.

RISING RATES IN QUESTION

Still, many in the industry are wary about the outlook for interest rates. The Bank of Canada tightened three times last year. Forecasters are divided on whether the next rate hike will come this year or next. 3/8

Carney himself and many industry executives predict the broader housing sector will cool as demand is eventually dampened by higher borrowing costs and other factors.

But some warn the housing boom of the past few years will not end well — which could hit the high-growth condominium sector particularly hard.

David Madani, Canada economist at Capital Economics, expects a cumulative 25% decline in the national average price over the next three years as income and population growth fail to keep pace.

“There’s a really large disconnect between house prices and the fundamentals. We don’t think that this is sustainable,” he said.

Ka Yan Ng, REUTERS
First posted: Monday, July 11, 2011 3:41:07 EDT PM
Source Link:
Canada condo boom may avoid crash | Money | Toronto Sun

Thursday, July 7, 2011

House prices may have hit the top

After six strong months, 'a slower second half of the year is expected,' a market update says. House prices have likely peaked after a strong six months, Royal LePage Real Estate Services said Thursday in a market update.

While prices saw big year-over-year price increases in the second quarter, "high house prices are concealing early signs of a moderating market."

"The market has seen its near-term peak in house price appreciation, and a slower second half of the year is expected," the real estate brokerage said in a statement.

Still, the national average price is expected to end the year 7.7 per cent higher than they started. At the end of the second quarter the average price for a standard two-storey home rose 6.1 per cent to $390,163, a bungalow rose 7.5 per cent to $356,625 and a condo rose 3.5 per cent to $238,064.

"In many of Canada's regional markets, we saw house prices appreciate at a significantly faster rate than wages and salaries, and this trend cannot continue indefinitely," said Phil Soper, chief executive officer.

Regional Market Summaries

Halifax: "Healthy year-over-year price gains across all three housing types surveyed. Strong local economy coupled
with low interest rates has driven demand in the region. At the end of 2011, average house prices in Halifax are
forecast to be 3.3 per cent higher than 2010."

Montreal: Detached bungalows and two-storey houses posted strong year-over-year gains - higher than 7 per cent in
the second quarter, while standard condominiums rose modestly by 1.9 per cent. At the end of 2011, average house
prices in Montreal are forecast to be 7.0 per cent higher than 2010. "

Ottawa: "Year-over-year price appreciation across all housing types surveyed. An average standard two-storey home
rose 5.2 per cent year-over-year to $371,500. Despite modestly rising inventory, at the end of 2011, average house
prices in Ottawa are forecast to be 5.0 per cent higher than 2010."

Toronto: "Seller's market witnessed strong year-over-year price appreciation. Price gains ranged from 4.7 per cent to
6.1 for the housing types surveyed. Low inventory coupled with low interest rates continue to drive real estate prices.
Lack of inventory was cited as the main reason for reduced market activity."

Winnipeg: "Confidence in the local economy has brought optimism to the market and is reflected in the real estate
market's performance. Detached bungalows rose 7.5 per cent to $281,125, while condominiums rose 6.6 per cent. At
the end of 2011, average house prices in Winnipeg are forecast to be 6.0 per cent higher than 2010."

Regina: "The largest year-over-year gain was seen in Regina, where standard two-storey homes jumped 15.6 per
cent. Detached bungalows also posted a strong 11 per cent gain. Regina's limited inventory has not been able to keep
up with the demand created by the booming local job market. At the end of 2011, average house prices in Regina are
forecast to be 12.4 per cent higher than 2010."

Calgary: "Witnessed moderate year-over-year price declines as it continues to adjust from the boom experienced in
the middle of the previous decade."

Edmonton: "Modest gains for standard two-storey homes and standard condominiums, while detached bungalows
posted a moderate year-over-year decrease. At the end of 2011, average house prices in Calgary are forecast to
increase 3.8 per cent while Edmonton house prices are expected to decrease moderately by 1.2 per cent compared to
2010."

Vancouver: "Experienced some of Canada's largest year-over-year price increases with detached bungalows rising
14.1 per cent and standard two-storey homes rising 12.0 per cent. Average prices for standard condominiums
stabilized rising 2.5 per cent. At the end of 2011, average house prices in Vancouver are forecast to be 15.4 per cent
higher than 2010. Unit sales in Vancouver, during 2011, are expected to be 6.0 per cent higher than 2010 indicating
strong market activity."

Article Link: http://license.icopyright.net/3.8425?icx_id=/icopyright/?
artid=2089425

July 7, 2011
House prices may have hit the top
By STEVE LADURANTAYE
Globe and Mail Update

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