Last week as the media covered the Bank of Canada rate drop pretty thoroughly and the rather interesting (read perhaps political) failure by the chief of the Bank to use the "R" word, recession. A pretty standard definition of this term is "a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters."
In the Bank's press release it said, "Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation." I italicized the "first half of the year" to point out that this in fact equals 2 quarters.
The rest of the piece has loads of optimism about the future growth, despsite the steep decline in the Chinese economy with the corresponding decline in demand for raw materials. It would seem the lower dollar should stimulate the other parts of the economy to help offset the decline in sales and investment in the resource sector, particularly oil and gas.
There does appear to be an improvement in the labour figures and consumer confidence is high. I often wonder if "high'' is, in part, an adjustment to the new reality, in other words have we lowered our expectations and are happy with the new norm, or does high mean we really think we will get back to spending like crazy?
On the mortgage front the rate drop is good news borrowers, particularly those of us with variable rate mortgages. It means if we keep the payments the same, we are paying down our mortgages incrementally faster, but in the long run even a few dollars more each month can make a big difference, especially if rates ever go up. While the banks are keeping some of the decrease, in January and this month they have only passed on 30 bps of the total 50 bps (or 0.50%) the Bank of Canada announced. There are any number of reasons given, but if you cannot beat them then buy the stock, since it probably means they will be making great profits this year, but then when don't they?
The other rumblings about mortgages hinge around regulations, now with the election in October, I am not sure the Conservatives are going to annoy people by tightening borrowing rules, not after they so generously bought votes this week by passing on money to parents of kids under 18, (most parties in power use similar pre-election giveaways) but the threat seems to be aimed squarely at first time buyers. They are talking about raising the minimum down payment.
While I agree first time buyers are the people taking the biggest risks relative to income compared to people selling one property to buy another. In other words they often buy as much as they can afford to get a foot in the door with as little as possible down. Why not? Most of these young people have come of age since 2008 and they do not know the days of 7-16%+ mortgage rates, and since things still look pretty bleak on the economic front around the world, then why worry about the increase? By the time a significant rate increase hits they will be in better financial shape and will own a much higher percentage of their homes. They also have a long life expectancy, and can pay it off over a long time. How else will they ever get into the market? Hope to win the lottery? Here is to hoping that the boom is not dropped lower on first time buyers.
