Many people ask, what will happen to fixed rates with inflation rising.  Fair question since most people talk solely about short term or variable rates lately.  I will stick my neck out.  First we need to understand how fixed rates are priced, let’s review from a previous post…If prices for bonds drop (which they have been doing) than yields go up – make it more attractive for people to buy at lower prices. If yields go up and mortgage lenders price off bonds that would suggest that prices have to go up (mortgage rates) as well. It is hard to say now how much yields have to increase to lead to mortgage rates increasing as spreads are at new historical amounts.Inflation pressures will cause yields to go up (likely by more in the short than long term). My guess (and it is only a guess) is that if inflation pressures remain, BoC will have to increase prime rate 100-150 bps in the next 12-18 months. Longer term rates may only rise by half that amount. There is a caveat to all this and that is spreads for interest rates continue to be at astronomical amounts compared to history, so as pressure mounts to increase rates to maintain the current spreads, some lenders in a competitive move may accept lower spreads to keep their rates lower and bring in more business.  Ultimately i think that is somewhat unlikely, because lenders know that when they have a rate that is significantly lower then the market they get so swamped with business that they normally can not handle the additional demand.  Ultimately again I would count on rising fixed rates… 

This article predicting inflation to hit 6% by years end in the US has surprisingly has not been that prevalent but Jeffrey Rubin, of CIBC World Markets has really stepped out.  Let me take excerpts from the article and then put my two cents in, for what it’s worth; He predicts that oil will end the year at about $130 (U.S.) a barrel, rising to the $150 range next year, despite a drop in U.S. demand for gasoline.Maybe you think this is ludicrous, or maybe you are scared that it may be true, but remember Rubin was the FIRST guy who predicted that the Canadian dollar would reach parity with the US dollar and that oil would hit $100 a barrel…Don’t bet against him.Higher oil prices will deter international trade, since it makes shipping prohibitively expensive. As a result, high oil prices act like a tariff barrier that will protect U.S. workers from international competition, and give labour a stronger bargaining position, CIBC predicts.This is an interesting phenomenon that I had not heard before but fundamentally makes sense, long term this is good for North American employment numbers, but ultimately will contribute to higher inflation as goods we normally could get cheaper abroad will be more expensive.

As a result, total inflation in the United States, which has already reached a 5 per cent pace, will jump to 6 per cent in the fourth quarter of 2008. And the Fed will respond by raising its benchmark interest rate by 200 basis points (a basis point is one one-hundredth of a basis point).

“History says we will be lucky if they don’t have to do more,” Mr. Rubin said.YIKES!  I have said this before and I will continue to say it, get your consumer debt under control, interest rates are going UP.Want more proof…He notes that the last time the United States had inflation that high was in 1990, and the Fed funds rate was about 7.5 per cent – three times higher than today.More…Bank of Canada Governor Mark Carney “will be eager to follow the Fed” and raise Canada’s key interest rate substantially in order to maintain the central bank’s inflation-fighting credibility, Mr. Rubin said. Most economists, however, predict the Bank of Canada to remain on hold for months to come.Bottom Line, as I said don’t bet against Mark Carney.  Rates are rising…guaranteed. 

Found yet another article on the pending government changes, but what was surprising was a fellow mortgage broker Mike Averbach who said “Overall, the changes aren’t expected to have a huge impact on the majority of mortgage applications. For those of whom it will impact, Averbach said this: “If you’re really struggling trying to get into the market and you require a 40-year amortization to get in, perhaps you shouldn’t be in it in the first place.” Why would he say this?  Lots of young people who are career strong and asset poor fully deserve to be in homes and can support home ownership, who use 40 year amortizations to enable their dream. To add insult to injury I think I might go crazy if I hear another “expert” justifying that these changes were needed to ward off a US style meltdown.  PLEASE, the fundamental issues that caused the US crisis are COMPLETELY different then anything in the Canadian mortgage industry, and once and for all I wish someone would just tell us the real reason they made these changes?Ok, rant over 

Another casualty bites the dust.  GE Money announced they are pulling out of the Canadian Sub-Prime business.  Sigh…

A great article from the President of Genworth Insurance Canada.worth the read 

Here is a great post on how the new government regs are explained

We all are putting our hopes now on the dark horse.  Today AIG announced that they will follow Genworth and CMHC to follow the federal government restrictions to put in by October 15th, to cut back maximum amortizations, and eliminate zero down among other things.That leaves PMI Canada as the last hope to “go it alone”.  Wanna bet on a long shot?  This is the one, because it is. 

With the number of civil lawsuits in the US at around 170 due to the sub-prime meltdown we should have known that someone was going to follow suit in Canada.  CIBC is the logical case since they are now at $6 Billion in writedowns and as much as $1 Billion or more to come this quarter. The suit is going after the bank AND it’s Directors and officers.  Love to watch this unfold  

That is the job of any Central banker in all developing countries.  Let’s be specific, The bank of Canada governor Mark Carney has made his point, the question is will he stick to it? Last week he was faced with a difficult decision to raise rates, or leave them where they are, some would argue he could have dropped them too, but that is way out there.Stagflation right now is considerably troubling for the Canadian economy, if he gets this wrong this could really hurt.  If he raises rates to curb inflation that the bank itself has projected could hit 4% by early 2009, then the already faltering economy will fall harder.  Consider this, the bank is projecting the economy in Canada to increase by a mere 1% in 2008, when you think of the boom in Alberta and Saskatchewan, and to a lesser extent in Newfoundland, and we still nationally only grow by 1% that would mean the rest of the country is experiencing some real difficult times.  So what if they decide that this is a more pressing issue and lower rates to spur on economic prosperity  as many of the premiers asked him to do this past friday?  Well, with inflation out of the bag and NOT at least somewhat under control you can be slammed into a painful and prolonged recession, think of the early 80’s.So, what are they to do then?  Exactly what they are doing, wait and see, but keep a laser focus on lean towards keeping inflation under control. Sorry Ontario and Quebec, but there will not be and should not be any more rate cuts, inflation is an ugly animal.

That is the job of any Central banker in all developing countries.  Let’s be specific, The bank of Canada governor Mark Carney has made his point, the question is will he stick to it? Last week he was faced with a difficult decision to raise rates, or leave them where they are, some would argue he could have dropped them too, but that is way out there.Stagflation right now is considerably troubling for the Canadian economy, if he gets this wrong this could really hurt.  If he raises rates to curb inflation that the bank itself has projected could hit 4% by early 2009, then the already faltering economy will fall harder.  Consider this, the bank is projecting the economy in Canada to increase by a mere 1% in 2008, when you think of the boom in Alberta and Saskatchewan, and to a lesser extent in Newfoundland, and we still nationally only grow by 1% that would mean the rest of the country is experiencing some real difficult times.  So what if they decide that this is a more pressing issue and lower rates to spur on economic prosperity  as many of the premiers asked him to do this past friday?  Well, with inflation out of the bag and NOT at least somewhat under control you can be slammed into a painful and prolonged recession, think of the early 80’s.So, what are they to do then?  Exactly what they are doing, wait and see, but keep a laser focus on lean towards keeping inflation under control. Sorry Ontario and Quebec, but there will not be and should not be any more rate cuts, inflation is an ugly animal.