Inflation dips in Canada; three provinces already at zero or less
By Julian Beltrame, The Canadian Press
OTTAWA - Annual inflation dipped sharply last month to the lowest level in two years as falling gasoline prices continued to drive the consumer price index toward zero and beyond.
Three provinces are already experiencing the rare phenomenon - P.E.I.'s inflation rate hitting zero last month, while Nova Scotia and New Brunswick had inflation rates of negative 0.2 per cent and 0.6 per cent respectively.
Overall, Canada's inflation rate dipped to 1.2 per cent in December, a level not seen since January 2007, and almost a full point below November's two-per-cent rate.
On a month-to-month basis, prices were generally 0.7 per cent lower last month than they were in November.
"This is first and foremost a gas price story now," said Douglas Porter, a senior economist with BMO Capital Markets, noting that excluding gasoline prices inflation would have been 2.6 per cent.
"But starting in the next few months, we'll see a shift where price drops become more broad-based."
Gasoline prices plunged 25.8 per cent in December - the steepest drop since Statistics Canada began the gas index in 1949 - after a 14.4 per cent decline in November.
Earlier this week, the Bank of Canada forecast that the country's inflation rate is likely to slide below zero in the second and third quarters of this year as food prices start reacting to less expensive energy and agricultural commodities, such as wheat.
Economists distinguish between disinflation and deflation. With disinflation, which is a slowing of the rate that prices increase, and deflation - a more dangerous situation in which there's a general decrease in prices over a longer period of time.
Deflation can be harmful to economic growth because buyers tend to delay purchases in the expectation that prices will fall and that, in turn, can create a cycle of lower sales, profits and asset values.
But bank governor Mark Carney said the risk of deflationis "remote."
Porter agrees deflation is unlikely, in part because the lower Canadian dollar will boost the cost of imported goods. But he added that deflation is still a possibility.
"It's not hard to work up a scenario where we repeat what Japan went through in the 1990s, where they did have prolonged deflation," Porter said.
Conference Board chief economist Glen Hodgson says most individuals would regard deflation as a good thing, since it reduces their cost of living, but they shouldn't.
"Japan's experience during the latter part of the 1990s provides critical evidence that prolonged deflation can lead to repeated bouts of recession and a tepid recovery in economic growth. No country wants to go there," Hodgson says.
At the moment, rising food prices remain the main reason inflation in Canada remains on the positive side.
Food at grocery stores cost 7.3 per cent more in December than 12 months earlier, while the cost of fresh vegetables jumped 26.9 per cent and bakery and cereal goods swelled 12.4 per cent.
If not for higher food store prices, inflation would already be at zero, Statistics Canada said.
Of the eight major sub-groups tracked by Statistics Canada, five continued to record increases in prices over the past year, led by food and shelter costs.
Other components showing increases were household furniture and equipment, health and personal care and alcohol and tobacco. Meanwhile, energy, transportation and clothing and footwear fell sharply.
Ironically, 2008 as a whole actually brought a relatively strong 2.3-per-cent increase in the consumer price index. But the trend has been sharply down in the latter quarter of the year.
The annual inflation rate was 1.2 per cent in December, says Statistics Canada. The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (Previous month in brackets):
-St. John's, N.L., 1.6 (2.6)
-Charlottetown-Summerside, 0.2 (2.3)
-Halifax, -0.1 (1.2)
-Saint John, N.B., -0.7 (0.7)
-Quebec, 0.5 (1.4)
-Montreal 0.7 (1.5)
-Ottawa 1.7 (2.2)
-Toronto 1.7 (2.3)
-Thunder Bay, Ont., 1.9 (2.4)
-Winnipeg, 2.0 (2.6)
-Regina 3.0 (3.6)
-Saskatoon 2.5 (3.1)
-Edmonton 2.0 (2.2)
-Calgary 2.4 (2.4)
-Vancouver 1.3 (2.3)
-Victoria 1.2 (2.1)
The annual inflation rate was 1.2 per cent in December, says Statistics Canada. Here's what happened in the provinces and territories. (Previous month in brackets):
-Newfoundland and Labrador 1.2 (2.4)
-Prince Edward Island 0.0 (2.3)
-Nova Scotia -0.2 (1.3)
-New Brunswick -0.6 (0.6)
-Quebec 0.5 (1.4)
-Ontario 1.5 (2.1)
-Manitoba 1.9 (2.7)
-Saskatchewan 2.6 (3.2)
-Alberta 1.9 (2.4)
-British Columbia 1.2 (2.0)
-Whitehorse, Yukon 3.0 (3.5)
-Yellowknife, N.W.T. 3.1 (4.7)
-Iqaluit, Nunavut 3.4 (3.4)
Friday, January 23, 2009
Tuesday, January 20, 2009
Bank of Canada Lowers Overnight rate target by 1%
Bank of Canada lowers overnight rate target by 1/2 percentage point to 1 per cent
Press Releases
FOR IMMEDIATE RELEASE
20 January 2009
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.
The outlook for the global economy has deteriorated since the Bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity. Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand. Major advanced economies, including Canada's, are now in recession and emerging-market economies are increasingly affected. Energy prices have fallen as a result of substantially weaker global demand.
Stabilization of the global financial system is a precondition for economic recovery. To that end, governments and central banks are taking bold and concerted policy actions. There are signs that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize. In addition, considerable monetary and fiscal policy stimulus is being provided worldwide.
Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence. Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis. As policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010.
A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1 per cent in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices. With inflation expectations well-anchored, total and core inflation should return to the 2 per cent target in the first half of 2011 as the economy returns to potential.
Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada's inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.
Information note:
A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report Update on 22 January 2009. The next scheduled date for announcing the overnight rate target is 3 March 2009.
Press Releases
FOR IMMEDIATE RELEASE
20 January 2009
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.
The outlook for the global economy has deteriorated since the Bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity. Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand. Major advanced economies, including Canada's, are now in recession and emerging-market economies are increasingly affected. Energy prices have fallen as a result of substantially weaker global demand.
Stabilization of the global financial system is a precondition for economic recovery. To that end, governments and central banks are taking bold and concerted policy actions. There are signs that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize. In addition, considerable monetary and fiscal policy stimulus is being provided worldwide.
Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence. Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis. As policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010.
A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1 per cent in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices. With inflation expectations well-anchored, total and core inflation should return to the 2 per cent target in the first half of 2011 as the economy returns to potential.
Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada's inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.
Information note:
A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report Update on 22 January 2009. The next scheduled date for announcing the overnight rate target is 3 March 2009.
Sunday, January 4, 2009
How countries are trying to jolt their slumping enonomies
The world's stimulating debate
How countries are trying to jolt their slumping economies
By Muriel Draaisma
World leaders from China to Mexico have announced plans in recent months to spend their way out of the global economic slowdown. Governments are scrambling to push their sluggish economies forward almost always through more spending.
As economic growth slows to a crawl, governments are trying to spark demand by
getting more money into the hands of consumers and enticing them to spend it.
Corporate and personal tax breaks, plans to build new roads and airports, and job-
creation programs are among the many measures being taken. The government of
Taiwan even plans to hand out shopping vouchers.
Here is how some countries around the world are handling the crisis:
Canada
Canada stands out in its decision not to offer a new spending package at least for now. No stimulus package was included in the government's economic update in late November. Finance Minister Jim Flaherty has said Canada has already introduced stimulus equal to 1.4 per cent of gross domestic product this year and two per cent of GDP next year. Measures already taken include cuts to the Goods and Services Tax and planning for infrastructure spending.
At a meeting in Washington earlier this month, members of the Group of 20 nations agreed that they would individually draw up economic stimulus plans that would equal about two per cent of GDP in each of their countries.
"Other countries are trying to catch up with Canada," Flaherty told CBC News after delivering his economic update in the House of Commons on Nov. 27. "We acted in advance."
But Flaherty has not ruled out more stimulus spending in the next budget, expected to
be unveiled in February 2009.
U.S.
In January, President George W. Bush signed into law a $107-billion US economic stimulus package that sent cheques to low- and middle-income families. They were delivered in the spring. Economists said many used the money to pay off debt, although spending did temporarily increase.
The Democrats lobbied for a second stimulus package in September, worth up to $300
billion US. Under the plan, the government would extend its unemployment insurance
benefits beyond 39 weeks and expand its food stamp program.
President-elect Barack Obama also called for a spending package to be implemented
immediately when he takes office in January 2009. Bush and the Republican party so
far have not committed to action.
The U.S., however, has not been shy about spending to prop up its financial system in
light of the financial crisis.
In addition to a $700-billion US financial bailout of the financial services industry
announced in October, the Federal Reserve announced on Nov. 25 plans to create two
additional programs. Potentially costing $800 million US (almost $1 billion Cdn), these
would lower mortgage rates and other consumer loan rates and to make those kinds of
loans more available.
Britain
The British government announced on Nov. 24 an economic stimulus package worth 20 billion pounds ($37 billion Cdn). The amount is about one per cent of Britain's gross domestic product.
In a pre-budget address, Alistair Darling, the chancellor of the exchequer or finance minister, said the government will reduce its value-added sales tax, known as VAT, to 15 per cent from 17.5 per cent until the end of 2009. The cut is effective Dec. 1. Taxes will increase for the country's top earners.
The cut is expected to cost the British treasury about 12.5 billion pounds ($23.7 billion Cdn).
"These are exceptional times and require exceptional measures," Darling said.
China
The Chinese government announced plans on Nov. 9 to spend about four trillion yuan
($722 billion Cdn) over the next two years on infrastructure and social welfare. It said it will reform taxes to cut industry costs by about 120 billion yuan.
China will spend money on 10 major areas, including low-cost housing, infrastructure (new railways, roads and airports), health, education, environmental protection and high technology.
And the government said it will spend on rebuilding disaster areas, including in Sichuan province, where 70,000 people were killed and millions were left homeless by an earthquake on May 12.
It will also remove credit limits for commercial banks to channel more lending to priority projects and rural development and it will reform the value-added tax system to cut taxes for enterprises.
Germany
The German government announced a stimulus package on Nov. 5 that includes tax breaks on new cars and credit assistance for companies. The package is to take effect over the next two years and cost the government about 23 billion euros ($36 billion Cdn) from until 2012.
Economy Minister Michael Glos said the package is designed to trigger investments of up to 50 billion euros ($79 billion Cdn).
The new package includes specific measures to help the ailing auto industry: a one-year holiday on tax for new cars and a two-year holiday on tax on most environmentally friendly vehicles.
Glos said every sixth job in Germany home to such automakers as Daimler, Porsche, Volkswagen and BMW is connected to the auto industry.
France
The French government said in late November it planned an economic stimulus package that will support the automobile and building industries, two sectors hard hit in France by the slowdown.
President Nicolas Sarkozy said the 19 billion euro ($30 billion Cdn) package, to be unveiled Dec. 4, will also increase government spending on infrastructure and include help for the environment.
Italy
The Italian government approved an economic stimulus package on Nov. 28, with the money to be spent on help for Italian banks, company tax breaks and financial support for low-income families.
According to one media report, the package is worth about five billion euros (about $8 billion Cdn), or less than 0.5 per cent of the gross domestic product in Italy.
Australia
The Australian government announced a $10.4 billion ($8.4 billion Cdn) economic security strategy on Oct. 14. The allocation worked out to about one per cent of GDP and wasdesigned to strengthen the Australian economy and support households.
The strategy includes support payments for low- and middle-income families and money to help first-time home buyers purchase a home. There will also be money for 56,000 training places and to push forward three national building funds.
Japan
The Japanese government in October pledged five trillion yen ($65 billion Cdn) in an economic stimulus plan to help households and small businesses deal with the slowdown.
The package came after the government announced in August it would spend two trillion yen to boost the economy.
Taiwan
The Taiwanese government said it plans a number of stimulus measures, worth $482.9 billion ($18 billion Cdn), that will be spread out over the next four years.
One of the measures includes $82.9 billion ($3 billion Cdn) in shopping vouchers for citizens. The vouchers, for $3,600 each (about $133 Cdn), are expected to be issued to all Taiwanese citizens early next year and must be used by the end of September 2009.
Mexico
The Mexican government announced in October a $4.4 billion US ($5.4 billion Cdn) economic stimulus package. The plan is partly designed to create jobs.
Mexican President Felipe Calderon said the "invisible hand" of the markets needs the "firm and just hand" of government and the "generous hand" of society.
The Organization of Economic Co-operation and Development said in a recent forecast that Mexico is particularly vulnerable to the U.S. economic slowdown.
Brazil
The Brazilian government is expected to be the next government to announce measures to boost its economy.
The Organization of Economic Co-operation and Development said in a recent forecast that economic activity "appears to be slackening" in Brazil, which has been a bit of an economic powerhouse in South America.
According to the OECD, growth in Brazil will slow to three per cent in 2009 from 5.3 per cent in 2008 but it will increase to 4.5 per cent in 2010.
European Union
The European Commission is urging EU governments to boost economic growth with a
stimulus plan worth 200 billion euros ($317 billion Cdn).
The European Economic Recovery Plan, which would be rolled out over two years, calls on all 27 EU members to spend more. The stimulus would represent 1.5 per cent of EU GDP.
About 170 billion euros ($270 billion Cdn) would come from national governments and the rest from EU funds and its lending arm, the European Investment Bank.
"Exceptional times call for exceptional measures," European Commission President Jose Manuel Barroso said in Brussels on Nov. 26. "This recovery plan is big and bold, yet strategic and sustainable."
How countries are trying to jolt their slumping economies
By Muriel Draaisma
World leaders from China to Mexico have announced plans in recent months to spend their way out of the global economic slowdown. Governments are scrambling to push their sluggish economies forward almost always through more spending.
As economic growth slows to a crawl, governments are trying to spark demand by
getting more money into the hands of consumers and enticing them to spend it.
Corporate and personal tax breaks, plans to build new roads and airports, and job-
creation programs are among the many measures being taken. The government of
Taiwan even plans to hand out shopping vouchers.
Here is how some countries around the world are handling the crisis:
Canada
Canada stands out in its decision not to offer a new spending package at least for now. No stimulus package was included in the government's economic update in late November. Finance Minister Jim Flaherty has said Canada has already introduced stimulus equal to 1.4 per cent of gross domestic product this year and two per cent of GDP next year. Measures already taken include cuts to the Goods and Services Tax and planning for infrastructure spending.
At a meeting in Washington earlier this month, members of the Group of 20 nations agreed that they would individually draw up economic stimulus plans that would equal about two per cent of GDP in each of their countries.
"Other countries are trying to catch up with Canada," Flaherty told CBC News after delivering his economic update in the House of Commons on Nov. 27. "We acted in advance."
But Flaherty has not ruled out more stimulus spending in the next budget, expected to
be unveiled in February 2009.
U.S.
In January, President George W. Bush signed into law a $107-billion US economic stimulus package that sent cheques to low- and middle-income families. They were delivered in the spring. Economists said many used the money to pay off debt, although spending did temporarily increase.
The Democrats lobbied for a second stimulus package in September, worth up to $300
billion US. Under the plan, the government would extend its unemployment insurance
benefits beyond 39 weeks and expand its food stamp program.
President-elect Barack Obama also called for a spending package to be implemented
immediately when he takes office in January 2009. Bush and the Republican party so
far have not committed to action.
The U.S., however, has not been shy about spending to prop up its financial system in
light of the financial crisis.
In addition to a $700-billion US financial bailout of the financial services industry
announced in October, the Federal Reserve announced on Nov. 25 plans to create two
additional programs. Potentially costing $800 million US (almost $1 billion Cdn), these
would lower mortgage rates and other consumer loan rates and to make those kinds of
loans more available.
Britain
The British government announced on Nov. 24 an economic stimulus package worth 20 billion pounds ($37 billion Cdn). The amount is about one per cent of Britain's gross domestic product.
In a pre-budget address, Alistair Darling, the chancellor of the exchequer or finance minister, said the government will reduce its value-added sales tax, known as VAT, to 15 per cent from 17.5 per cent until the end of 2009. The cut is effective Dec. 1. Taxes will increase for the country's top earners.
The cut is expected to cost the British treasury about 12.5 billion pounds ($23.7 billion Cdn).
"These are exceptional times and require exceptional measures," Darling said.
China
The Chinese government announced plans on Nov. 9 to spend about four trillion yuan
($722 billion Cdn) over the next two years on infrastructure and social welfare. It said it will reform taxes to cut industry costs by about 120 billion yuan.
China will spend money on 10 major areas, including low-cost housing, infrastructure (new railways, roads and airports), health, education, environmental protection and high technology.
And the government said it will spend on rebuilding disaster areas, including in Sichuan province, where 70,000 people were killed and millions were left homeless by an earthquake on May 12.
It will also remove credit limits for commercial banks to channel more lending to priority projects and rural development and it will reform the value-added tax system to cut taxes for enterprises.
Germany
The German government announced a stimulus package on Nov. 5 that includes tax breaks on new cars and credit assistance for companies. The package is to take effect over the next two years and cost the government about 23 billion euros ($36 billion Cdn) from until 2012.
Economy Minister Michael Glos said the package is designed to trigger investments of up to 50 billion euros ($79 billion Cdn).
The new package includes specific measures to help the ailing auto industry: a one-year holiday on tax for new cars and a two-year holiday on tax on most environmentally friendly vehicles.
Glos said every sixth job in Germany home to such automakers as Daimler, Porsche, Volkswagen and BMW is connected to the auto industry.
France
The French government said in late November it planned an economic stimulus package that will support the automobile and building industries, two sectors hard hit in France by the slowdown.
President Nicolas Sarkozy said the 19 billion euro ($30 billion Cdn) package, to be unveiled Dec. 4, will also increase government spending on infrastructure and include help for the environment.
Italy
The Italian government approved an economic stimulus package on Nov. 28, with the money to be spent on help for Italian banks, company tax breaks and financial support for low-income families.
According to one media report, the package is worth about five billion euros (about $8 billion Cdn), or less than 0.5 per cent of the gross domestic product in Italy.
Australia
The Australian government announced a $10.4 billion ($8.4 billion Cdn) economic security strategy on Oct. 14. The allocation worked out to about one per cent of GDP and wasdesigned to strengthen the Australian economy and support households.
The strategy includes support payments for low- and middle-income families and money to help first-time home buyers purchase a home. There will also be money for 56,000 training places and to push forward three national building funds.
Japan
The Japanese government in October pledged five trillion yen ($65 billion Cdn) in an economic stimulus plan to help households and small businesses deal with the slowdown.
The package came after the government announced in August it would spend two trillion yen to boost the economy.
Taiwan
The Taiwanese government said it plans a number of stimulus measures, worth $482.9 billion ($18 billion Cdn), that will be spread out over the next four years.
One of the measures includes $82.9 billion ($3 billion Cdn) in shopping vouchers for citizens. The vouchers, for $3,600 each (about $133 Cdn), are expected to be issued to all Taiwanese citizens early next year and must be used by the end of September 2009.
Mexico
The Mexican government announced in October a $4.4 billion US ($5.4 billion Cdn) economic stimulus package. The plan is partly designed to create jobs.
Mexican President Felipe Calderon said the "invisible hand" of the markets needs the "firm and just hand" of government and the "generous hand" of society.
The Organization of Economic Co-operation and Development said in a recent forecast that Mexico is particularly vulnerable to the U.S. economic slowdown.
Brazil
The Brazilian government is expected to be the next government to announce measures to boost its economy.
The Organization of Economic Co-operation and Development said in a recent forecast that economic activity "appears to be slackening" in Brazil, which has been a bit of an economic powerhouse in South America.
According to the OECD, growth in Brazil will slow to three per cent in 2009 from 5.3 per cent in 2008 but it will increase to 4.5 per cent in 2010.
European Union
The European Commission is urging EU governments to boost economic growth with a
stimulus plan worth 200 billion euros ($317 billion Cdn).
The European Economic Recovery Plan, which would be rolled out over two years, calls on all 27 EU members to spend more. The stimulus would represent 1.5 per cent of EU GDP.
About 170 billion euros ($270 billion Cdn) would come from national governments and the rest from EU funds and its lending arm, the European Investment Bank.
"Exceptional times call for exceptional measures," European Commission President Jose Manuel Barroso said in Brussels on Nov. 26. "This recovery plan is big and bold, yet strategic and sustainable."
Tuesday, December 30, 2008
Mortgage Outlook
Slightly lower mortgage rates and house prices.
The credit crunch is far from over. But with credit spreads improving notably since early September, it seems that the market's focus is slowly shifting towards the US economy, which is deep in recession. Overall, it lost 1.2 million jobs this year, with about half of that taking place in the last three months.
What will it take to get out of this recessionary territory? The Federal Reserve has more ammunition than simply cutting rates—and in this sense, it's more powerful than in previous recessions. Specifically, the Troubled Assets Relief Program (otherwise known as the bailout) gave the Fed more flexibility to provide liquidity to banks without driving the effective Fed funds rate to 0%.
In Canada, the labour market continues to surprise on the upside. But it won't last. Look for notable slowing in the coming six months, with the unemployment rate approaching 7% by mid-2009.
House prices are falling, but not as much as the headlines say.
House prices in Canada are falling. But the headline numbers can be very misleading. In Vancouver, for instance, the close to 45% year-over-year fall in the number of homes sold and the fact that Vancouver prices are much higher than the national average combined to make it look as though national home prices were falling sharply. In fact, the decline was driven by fewer expensive homes being sold in Vancouver, as a fraction of the whole. As a result, the national headline number for October is down by close to 6% from a year ago. But if properly weighted, house prices actually fell by only 1%.
As far as interest rates are concerned, we're expecting the prime rate to drop a little farther. It's possible that we'll see long term rates dropping a bit too. But most of the decline in long term rates is already priced into the 5 year rate, so we won't see fixed rates declining by as much as the variable interest rate.
Benjamin Tal
Senior Economist
CIBC World Markets
What this means to you.
With variable and fixed mortgage rates still near historic lows, both options can offer real value. Deciding which one is most cost-effective for you depends entirely on your needs and plans. To help you make that decision, I’m happy to sit down with you and perform a no-charge analysis of your goals, requirements and financial abilities. Please feel free to call me at any time.
Giuseppe Strazzeri
Mortgage Specialist
Phone: 905-778-8100 ext 5161
Email: mymortgage@giuseppestrazzeri.com
The credit crunch is far from over. But with credit spreads improving notably since early September, it seems that the market's focus is slowly shifting towards the US economy, which is deep in recession. Overall, it lost 1.2 million jobs this year, with about half of that taking place in the last three months.
What will it take to get out of this recessionary territory? The Federal Reserve has more ammunition than simply cutting rates—and in this sense, it's more powerful than in previous recessions. Specifically, the Troubled Assets Relief Program (otherwise known as the bailout) gave the Fed more flexibility to provide liquidity to banks without driving the effective Fed funds rate to 0%.
In Canada, the labour market continues to surprise on the upside. But it won't last. Look for notable slowing in the coming six months, with the unemployment rate approaching 7% by mid-2009.
House prices are falling, but not as much as the headlines say.
House prices in Canada are falling. But the headline numbers can be very misleading. In Vancouver, for instance, the close to 45% year-over-year fall in the number of homes sold and the fact that Vancouver prices are much higher than the national average combined to make it look as though national home prices were falling sharply. In fact, the decline was driven by fewer expensive homes being sold in Vancouver, as a fraction of the whole. As a result, the national headline number for October is down by close to 6% from a year ago. But if properly weighted, house prices actually fell by only 1%.
As far as interest rates are concerned, we're expecting the prime rate to drop a little farther. It's possible that we'll see long term rates dropping a bit too. But most of the decline in long term rates is already priced into the 5 year rate, so we won't see fixed rates declining by as much as the variable interest rate.
Benjamin Tal
Senior Economist
CIBC World Markets
What this means to you.
With variable and fixed mortgage rates still near historic lows, both options can offer real value. Deciding which one is most cost-effective for you depends entirely on your needs and plans. To help you make that decision, I’m happy to sit down with you and perform a no-charge analysis of your goals, requirements and financial abilities. Please feel free to call me at any time.
Giuseppe Strazzeri
Mortgage Specialist
Phone: 905-778-8100 ext 5161
Email: mymortgage@giuseppestrazzeri.com
Wednesday, December 24, 2008
Retainers versus Lenders Due Diligence Deposits and Commitment Fees
We are providing the client with a specific lender who can offer financing to them based on the lenders review of the representations made by the borrower with respect to loan size, geography, credit profile type and mix of collateral etc. The retainer paid to us by the borrower is not a deposit to be used for due diligence but rather an engagement fee to arrange for the specific financing.
We require this retainer to protect ourselves against situations where our borrower has inadvertently misrepresented the value of collateral or the cash flows to cover debt service. It would also protect us in a case where the lender finds they cannot perfect a security interest in the collateral being offered or the borrower cannot provide the necessary documentation that the lender requires.
Because we do not require any exclusivity with respect to our fee agreement, the retainer also protects us in the event that the borrower obtains financing elsewhere, secures an equity infusion, or simply decides that they do not require the financing at this time. If the loan does not close for any reason, other that our inability to produce a capable lender, then the retainer covers our time, effort and expense regarding the work done by us.
We represent hundreds of lenders across the country and all generally require the borrower to cover their costs of due diligence prior to loan closing. The only exception to this rule is a local bank ( if the business is bankable ) who typically will not need such a deposit. If lenders were to pay the due diligence costs they would often waste their money traveling to the borrowers company or property and performing appraisals and audits on situations where the results of that due diligence were such that the loan cannot be closed.
If the lender were willing to pay for the examination and investigation necessary to close the loan, borrowers who have problems might not disclose them in hopes that the lender would not discover these issues that may have previously caused the loan to be rejected.
The lender will not require their due diligence deposit until they have issued their formal proposal outlining the specific terms and conditions that will apply based on the representations made to them by the borrower. The purpose of the due diligence is to allow the lender to confirm that the representations made by the borrower are true and correct so that they can close the loan.
Lenders due diligence may include a site inspection at your company focusing on your back office operations relative to the performance of your accounts receivable. Particularly they will want to examine the exact service or product provided, how you bill, to whom you are billing, the net collectable amount paid to you after allowances and deductions, any potential offsets due other parties or issues that could lead to offsets and the historical performance of your AR's collect ability.
Clearly, as the lender is typically expert in such matters you can benefit from such expertise as it relates to the efficient billing of your accounts and the ability to diminish underpayments etc. Real Estate, equipment and inventory appraisals that are more than 6 months old will likely need to be updated or in some cases may need to be redone.
The lender will also be concerned with the character of the borrower (both from a company perspective as well as from the principals perspective) as it relates to previous issues of fraud or bankruptcy etc. They will also need to clearly confirm the viability of the company going forward and any legal issues that might cause them to suffer a loss with respect to the loan to be consummated.
This could include the possible inability of the lender to obtain a first lien against the collateral or the borrower’s inability to cover debt service etc. The lender will be available to explain in detail what could cause them not to close the loan so that there are no surprises once you have agreed to their terms and conditions and before you pay for the due diligence.
Most lenders make the deposit refundable minus specific expenses in the unlikely event that they are unable to conclude the loan. Due diligence deposits vary widely from lender to lender but are generally in the $2,500 to $25,000 range. A loan transaction of $10,000,000 or more might require a due diligence deposit of greater than $25,000.
Once the due diligence is complete some lenders will issue a commitment to fund at which time the borrower will be required to post a commitment fee which will be around 1 point on the loan amount. If the borrower walks away from the transaction prior to closing they will forfeit this fee. Some lenders will go straight to closing after completion of due diligence and will not require a commitment fee. Normally, once the commitment fee is paid the only steps to be taken prior to funding would be the negotiation and execution of closing documents.
We require this retainer to protect ourselves against situations where our borrower has inadvertently misrepresented the value of collateral or the cash flows to cover debt service. It would also protect us in a case where the lender finds they cannot perfect a security interest in the collateral being offered or the borrower cannot provide the necessary documentation that the lender requires.
Because we do not require any exclusivity with respect to our fee agreement, the retainer also protects us in the event that the borrower obtains financing elsewhere, secures an equity infusion, or simply decides that they do not require the financing at this time. If the loan does not close for any reason, other that our inability to produce a capable lender, then the retainer covers our time, effort and expense regarding the work done by us.
We represent hundreds of lenders across the country and all generally require the borrower to cover their costs of due diligence prior to loan closing. The only exception to this rule is a local bank ( if the business is bankable ) who typically will not need such a deposit. If lenders were to pay the due diligence costs they would often waste their money traveling to the borrowers company or property and performing appraisals and audits on situations where the results of that due diligence were such that the loan cannot be closed.
If the lender were willing to pay for the examination and investigation necessary to close the loan, borrowers who have problems might not disclose them in hopes that the lender would not discover these issues that may have previously caused the loan to be rejected.
The lender will not require their due diligence deposit until they have issued their formal proposal outlining the specific terms and conditions that will apply based on the representations made to them by the borrower. The purpose of the due diligence is to allow the lender to confirm that the representations made by the borrower are true and correct so that they can close the loan.
Lenders due diligence may include a site inspection at your company focusing on your back office operations relative to the performance of your accounts receivable. Particularly they will want to examine the exact service or product provided, how you bill, to whom you are billing, the net collectable amount paid to you after allowances and deductions, any potential offsets due other parties or issues that could lead to offsets and the historical performance of your AR's collect ability.
Clearly, as the lender is typically expert in such matters you can benefit from such expertise as it relates to the efficient billing of your accounts and the ability to diminish underpayments etc. Real Estate, equipment and inventory appraisals that are more than 6 months old will likely need to be updated or in some cases may need to be redone.
The lender will also be concerned with the character of the borrower (both from a company perspective as well as from the principals perspective) as it relates to previous issues of fraud or bankruptcy etc. They will also need to clearly confirm the viability of the company going forward and any legal issues that might cause them to suffer a loss with respect to the loan to be consummated.
This could include the possible inability of the lender to obtain a first lien against the collateral or the borrower’s inability to cover debt service etc. The lender will be available to explain in detail what could cause them not to close the loan so that there are no surprises once you have agreed to their terms and conditions and before you pay for the due diligence.
Most lenders make the deposit refundable minus specific expenses in the unlikely event that they are unable to conclude the loan. Due diligence deposits vary widely from lender to lender but are generally in the $2,500 to $25,000 range. A loan transaction of $10,000,000 or more might require a due diligence deposit of greater than $25,000.
Once the due diligence is complete some lenders will issue a commitment to fund at which time the borrower will be required to post a commitment fee which will be around 1 point on the loan amount. If the borrower walks away from the transaction prior to closing they will forfeit this fee. Some lenders will go straight to closing after completion of due diligence and will not require a commitment fee. Normally, once the commitment fee is paid the only steps to be taken prior to funding would be the negotiation and execution of closing documents.
Saturday, December 20, 2008
Financial Crisis
Good morning!
A lot of people are wondering if there is anything at all good that will come from the financial crisis.
Call me naïve if you like or even an eternal optimist, but I think so beginning with the following:
A regulatory overhaul leading to pro-active regulation: Much of our legal structure in the west is based on hundreds of years of English common law. That means new regulation is typically moved forward only after something has happened or as a function of something that's not contemplated by existing regulation.
With regard to the financial markets, I believe that's going to change and that we will see new pro-active mechanisms designed to monitor problems before they get out of control. Some of that will include more transparent valuations and mark to market rules, but the lion's share will likely focus on the credit extension problems that have largely created this mess on a variety of levels.
What's more, history suggests these changes will stand in stark contrast to Alan Greenspan's repeated refusals to crack down on sub-prime lending practices and his hesitation to impose regulations on derivatives that have figured so prominently in the current meltdown. Whether this happens on Bernanke's watch or not, I don't know. He may not be the right guy for the job.
A dramatic shift with regard to how firms understand and quantify risk. Beginning with accountability. A critical first step will be an overhaul of the incestuous and highly conflicted ratings agencies that have been in bed with Wall Street for years. There will, of course, be resistance from both Wall Street and the ratings agencies themselves, but the need for more objectively rated instruments could hardly be more clear than right now. Nor could the need to have the value and quality of financial instruments be determined by the ultimate valuation mechanism – open markets.
Greed and avarice will be replaced by thrift and integrity. Just like it's been in the past at other points in our history, saving will become an honorable concept again. And that will become an important part of the recovery process if for no other reason than history shows until you have credit going up instead of down, you can't have growth.
Risk aversion will rule for a long time. People, and indeed entire industries, have learned their lessons the hard way this time around. That suggests that dividends and income paid by companies engaged in real products with real cash flow will once again resume their rightful place among the most important investments people can make.
In closing, there are obviously lots of other changes that will occur, too. Without a doubt many of them will be in areas we haven't yet tackled or aren't yet thinking about.
Which is also good news for as my dad put it yesterday so succinctly, "the financial crisis is like an extremely low tide. Until the water runs out, you can't see how much crap needs to be cleaned out of the harbor."
Best regards,
Keith
A lot of people are wondering if there is anything at all good that will come from the financial crisis.
Call me naïve if you like or even an eternal optimist, but I think so beginning with the following:
A regulatory overhaul leading to pro-active regulation: Much of our legal structure in the west is based on hundreds of years of English common law. That means new regulation is typically moved forward only after something has happened or as a function of something that's not contemplated by existing regulation.
With regard to the financial markets, I believe that's going to change and that we will see new pro-active mechanisms designed to monitor problems before they get out of control. Some of that will include more transparent valuations and mark to market rules, but the lion's share will likely focus on the credit extension problems that have largely created this mess on a variety of levels.
What's more, history suggests these changes will stand in stark contrast to Alan Greenspan's repeated refusals to crack down on sub-prime lending practices and his hesitation to impose regulations on derivatives that have figured so prominently in the current meltdown. Whether this happens on Bernanke's watch or not, I don't know. He may not be the right guy for the job.
A dramatic shift with regard to how firms understand and quantify risk. Beginning with accountability. A critical first step will be an overhaul of the incestuous and highly conflicted ratings agencies that have been in bed with Wall Street for years. There will, of course, be resistance from both Wall Street and the ratings agencies themselves, but the need for more objectively rated instruments could hardly be more clear than right now. Nor could the need to have the value and quality of financial instruments be determined by the ultimate valuation mechanism – open markets.
Greed and avarice will be replaced by thrift and integrity. Just like it's been in the past at other points in our history, saving will become an honorable concept again. And that will become an important part of the recovery process if for no other reason than history shows until you have credit going up instead of down, you can't have growth.
Risk aversion will rule for a long time. People, and indeed entire industries, have learned their lessons the hard way this time around. That suggests that dividends and income paid by companies engaged in real products with real cash flow will once again resume their rightful place among the most important investments people can make.
In closing, there are obviously lots of other changes that will occur, too. Without a doubt many of them will be in areas we haven't yet tackled or aren't yet thinking about.
Which is also good news for as my dad put it yesterday so succinctly, "the financial crisis is like an extremely low tide. Until the water runs out, you can't see how much crap needs to be cleaned out of the harbor."
Best regards,
Keith
Monday, November 24, 2008
Subscribe to:
Posts (Atom)
