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Fear Trumps Low Interest Rates For Canadian Consumers!
OTTAWA - Jim Rawson says it's a great time to buy a house.
The regional manager of Invis mortgage brokerage firm in Toronto has been in the business since 1978 and has never seen interest rates, both variable and fixed, so low. Pair that with falling housing prices and it's a no-brainer.
"People have to have somewhere to live and whether you are paying for a mortgage or paying rent, you still have to be paying to live somewhere," Rawson explains.
But something is missing in the equation. As prices for most consumer goods, cars and homes decline - in some cases plunge - and the cost of borrowing falls, Canadians have been hesitant to buy.
The Bank of Canada did its part this week to lure consumers and businesses out of their fox hole, dropping the overnight rate down to an unheard of half per cent - virtually zero.
Canada's chartered banks lowered their prime rate to 2.5 per cent on Tuesday, shortly after the central bank moved, and by the end of the week were lowering other lending rates.
TD Canada Trust, for one, is reducing several of its posted fixed-term mortgage rates on Saturday. TD's biggest decrease was with its two-year mortgage, which falls to 5.0 per cent from 5.75 per cent.
Scotiabank went even further, lopping nearly two full percentage points off the advertised price for its 10-year mortgage, which fell to 5.25 per cent from 7.15 per cent, effective Friday.
By almost every measure, Canadians have slowed down borrowing and spending, most visibly in the auto sector, which saw sales volume crash by 28 per cent in February.
The Canadian housing market, for years a source of boundless growth, has come crashing to earth with sales, prices, and construction of new homes all down, in many cases by double-digits.
Consumers have also stopped discretionary purchases, as the 5.4 per cent contraction in retail sales in December - the largest in 15 years - shows.
"I think they're scared out there," says Bruce Cran of the Consumers' Association of Canada. "Consumers are tapped out and frightened of over-spending. They are going back to being savers."
Bank of Canada deputy governor Pierre Duguay may have a point in saying there is a danger of "irrational fear" taking hold, but there are also very real reasons to be concerned.
Canada lost 129,000 jobs in January, the third straight month of decline, and announcements of future layoffs are being posted almost daily. Everyone is predicting the Canadian economy has much further to fall after contracting 3.4 per cent in December.
There is also fact that the days of easy money are over. Chartered banks are being more choosy who they lend to and interest rates - low as they are - are higher than they might be given the central bank rate and non-existent inflation.
Variable rate mortgages, for example, formerly could be had below the banks' prime rate. The prime rates have fallen, along with the Bank of Canada's moves, but now banks' variable mortgage rates are well above prime.
Individuals have also cut back on borrowing, hence spending. TD Bank chief executive Ed Clark said this week that overall demand for loans is coming down.
Under normal times, economists would say that is a good thing. Rampant buying, particularly in the United States, was a major contributor to the financial sector meltdown that brought the world low.
Americans have now pulled back big time making matters worse, even though the Federal Reserve rate at 0.25 per cent is lower than the Bank of Canada's. The U.S. once lamentable savings rate has shot from just above one per cent to five per cent in a matter of months.
The amount of debt Canadians held as a ratio of their income increased last year to 136 per cent from 130 per cent. What kept them solvent is that low interest rates made the cost of servicing that mounting debt at affordable levels.
That is as long as jobs, incomes and the economy were advancing. In a recent CIBC World Markets report, economist Benjamin Tal showed the squeeze was underway.
Canadians assets fell by $160 billion in the third quarter, he noted, adding that with house and equity values falling, Canadians would likely be another $180 billion poorer in the fourth quarter. Values haven't gotten better since.
As well, debt is rising and consumer bankruptcies are jumping - 13.5 per cent last year with expectations they could hit 30 per cent growth this year. Mortgage arrears are also on an upward path, rising from a record low of 0.24 per cent to the current 0.33 per cent, the highest in six years.
But the big number, says Tal, is the number of Canadians who have lost their job and the much bigger number that are for the first time in many years afraid of losing their job.
"The issue is confidence," he said. "People talk about the unemployment rate going to eight and nine per cent, but the focus should be on the 91 per cent of people who are employed and are concerned about their jobs."
Tal and most economists believe that Canadians will start spending again because they no longer can put off purchases. But he doesn't believe they will spend with the reckless abandon of the recent past.
"After the crisis is over, consumer spending will be stronger but not like it used to be because it was artificially strong before, using borrowed money," Tal said.
Rawson believes that time is coming soon, at least in the housing market.
Applications for mortgages in his Toronto office have doubled since December, Rawson says, with many in the pre-approved market. That usually involves first-time prospective buyers making sure all their ducks are lined up before taking the plunge.
"These are people who haven't bought yet but they will buy in the future," he says.
Dan and Rachael Polakovic
www.two-realtors.com
