I happened to catch an episode of The West Block late last night, Tom Clark had invited everyone's favourite central banker in for a brief chat. As you may know, Mark Carney is the Bank of Canada governor in addition to chairing the Financial Stability Board, tasked with reforming global financial institutions. Tom Clark conducted a fantastic interview with Mr. Carney and here is a brief overview of the discussion.
Canadians have been advised over the last few months that interest rates will inevitably rise. They will adjust interest rates in order to achieve the 2% inflation target first and foremost. This will put some Canadians in risk, especially those that stretched for the last possible dollar to purchase a house. The rate of household debt is down from 10% to 4% over the course of this year so it seems that Canadians are not dipping further into debt as of late so the warnings seem to be working. This is a good thing. The Office of the Superintendent of Financial Institutions Canada (OSFI) and the Federal Government are tightening some of the terms in which banks can lend. Individuals need to have more capital to purchase a property, there are tighter underwriting standards and the mortgage insurance terms have been tightened three separate times over the last couple of years. It's been rumoured that there may be some additional changes in the future so I will post those as soon as they're available.
The US Feds have made an expectation that they will not raise interest rates until 2014, does this have any bearing on what Canada will do? That policy does indeed support the US economy and in turn keeps some strength in the Canadian economy as well. Monetary policy in Canada is key, keeping inflation under control is a priority because in the end inflation harms the most vulnerable in our society.
Does Wall Street still pose a threat like it did to Canadians in 2007? Mr. Carney mentions that Wall Street, Bay Street, the City of London, the Chinese Financial System are all resiliant and Canada is not going to see the big external shot that we all experienced in 2007/2008 that resulted in a recession. There has been a lot of progress in building capital in the banks internationally, we have made progress in improving liquidity and are making progress in making derivatives in other markets more resiliant and safer. We are more than half way along the process of financial reform. This is where it gets tough, we get the pushback from the industry and it's just something that we have to maintain.
The European Crisis is a global situation and this will be taken into account for any adjustment on monetary policy. The largest external risk is Europe so it's a waiting game to see how that plays out and from there we'll need to adjust our policies should things go poorly. It's expected that the issues in Europe should be contained and isolated within Europe. There are political difficulties associated with Europe which could come into play. Europes issues will not be dealt with overnight, this is something that is going to take weeks, months and even years. What matters more is what we do here, what happens in the United States and our ability to grow into emerging markets.
Things today are different than many years ago. Canadians used to save money, whether it was stashed in a shoe box or in the bank, cash was on hand. This is simply not the case today. Many Canadians are living paycheque to paycheque and those in the demographics between the ages of 25 - 65 are especially reliant on their credits cards and Home Equity Lines of Credit; almost using their houses as ATM's. This has been a financial innovation. Mr. Carney encourages all Canadians to build up an efficient level of savings, in doing so this will assist in managing inflation well, managing the financial system functioning throughout good times and bad and keep the economy growing.
My expert suggestions are to put away a few dollars here and there for rainy days and do not leverage your house to the absolute maximum. What I mean by that is limit the amount you will borrow from a Home Equity Line of Credit if you indeed have one. As always, prepare yourself for slightly higher mortgage payments and contact me for additional ways to reduce the amount of interest charged over the life of your mortgage. At the end of the day, we all like to save some extra cash so let's put some dollars back into those jeans of yours...or shoebox!
As always, I encourage you to contact me if you have any questions with your current mortgage or are looking for one. Please find me on facebook at Jason Nesseth | Mortgage Specialist | British Columbia and on twitter @jasonmortgages.
"Working with you for the life of your mortgage"
Jason Nesseth with TMG The Mortgage Group Canada Inc. If you have any questions or comments about this blog, please feel free to call Jason at 604.375.7375, email jason.n@mortgagegroup.com or visit his website at jasonnesseth.com
The West Block with Tom Clark, Special Guest Mark Carney