Home prices about to hit record highs – Should I buy now?

Last year I wrote about and predicted repeatedly that home prices would surge in the first half of 2010 because of two important elements:

1) Extremely low mortgage rates

2) The harmonization of the GST and PST this coming July, resulting in a tax hike on the purchase of a new home

The Canadian Real Estate Association (CREA) released its projections yesterday, stating that the average price of a home is expected to rise by 5% this year. The real estate industry’s advocate also projects this year to set record sales before the market cools off next year. Strong demand in western Canada coupled with low interests rates paved the way for a huge rebound in prices compared to where they were in the midst of the recession in late 2008 and early 2009.

In the course of just one year, with December 2008 marking probably one of the worst months on record for Realtors, this past December of 2009 demonstrated an impressive comeback with housing prices rising by more than 19%. Such a significant increase over a short time span, especially with the economy barely emerging into growth after a recession and high unemployment remaining persistent, raised alarm bells in Ottawa, leading both Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney to warn against the ushering of yet another real estate price bubble late last year.

The Bank of Canada has since toned down its rhetoric, stating last week that it does not believe Canada is experiencing a real estate price bubble and that so far the aggregate increases over the past year have been mostly in line with supply and demand forces in the market.

CREA insists that people shouldn’t read too much into the hike in housing prices simply because prices dropped significantly in 2008 and 2009. As such, an increase of, say, 20% should not be regarded as an indicator of a hot market but rather the market correcting itself after an abysmal showing.

My own take on the situation

The fact that we are currently in a seller’s market should be of concern for those who are looking to buy a home over the next few months. It’s clear that short-term measures, such as low interest rates, and speculation (just how high housing prices can be pushed) is creating an artificial increase in value throughout Canada.

Perhaps the worst thing a homeowner can face is being underwater with their mortgage. Being underwater means your mortgage is worth more than your home, which is the type of situation that no homeowner wants to find themselves in. When you obtain a mortgage, you are borrowing a fixed (and very significant) amount of money to pay for an item that has a theoretical value. Should the value of the property decrease, your equity position, or rather your net worth position, decreases with it. However, the loan amount that you have borrowed remains the same.

Unbeknownst to many Canadians, the same values that hold true to investing must be applied when purchasing real estate. While the real estate market is not as volatile as the equities market, both are highly cyclical and are subject to constant peaks and valleys. One mistake most accredited investors avoid, one would at least hope so, is buying securities at the peak of the market. But how does one know when the peak is reached? We know that over the long term, the general trend of return on investment in the stock market is upwards. The standard deviation decreases the longer you stay invested. But playing Russian roulette in the short term can have a tremendous impact on your finances.

The same approach should be used when buying real estate. You want to avoid buying at the peak of the market. Buying at the peak makes yourself vulnerable to forces of speculation that’s uncorrelated to market fundamentals. The reason why housing prices rebounded so magnificently over a short period of time is a culmination of buyers rushing to secure a mortgage before rates would increase. I believe that’s the primary factor. The harmonization of the GST and PST also play a role, albeit a limited one. Note that the HST is charged only on the purchase of a new home. Resale homes are not affected, which is why I believe that mortgage rates are the driving force.

In addition, economic factors are not satisfactory to warrant such a rapid increase in prices. Experts can argue that perhaps people are feeling more secure about the economy improving and are less concerned about losing their jobs and have made a decision that now would be a good time to buy. After all, we’re not yet at peak price levels that we have seen back in 2007, leading some buyers to believe that even with the recent increases in housing prices, buying a home now would still represent a good value.

The problem is even CREA admitted that prices would cool off next year. This is quite logical given that by this time next year mortgage rates will likely be higher than where they are today. In that sense, CREA may have implicitly admitted that people who are rushing to buy now may indeed be buying during a market peak, or at least a price level heading towards a market peak. Although it may not be the peak of 2007 and early 2008, it’s still a peak. Buying at the peak would lead people to borrow more, which would translate into thousands of dollars in losses in the future.

The formula is rather simple: higher housing prices equals borrowing more funds to finance the purchase equals having a higher mortgage balance equals paying more interest due to the fact you’re borrowing more equals paying a higher amount of interest in the long run as rates increase equals a reduced equity position should housing prices return to more realistic levels equals many thousands of dollars out of your pocket… just because you bought during a peak.

It’s certainly true that for most areas in the GTA housing prices will continue to appreciate in the long run. The problem is that the rate of appreciation does not keep pace with the financial burden that would be experienced if you are buying a property during the peak of the market.

Smart buyers never buy when the market is hot.

Current Rates is back… with even more information

I decided to bring back my current rates sheet.

The set-up, however, will be a little different. You have to download the sheet to view the rates. I will also include with every rate update different information about mortgages and the markets which you may find useful.

If you have any questions, let me know!

Lack of financial education

Today’s Star had an interesting snip about a recent financial survey. While it’s a well-known fact that Canadians are historically risk-averse with their finances, being conservative doesn’t necessarily mean being informative.

The survey, which took place at the onset of the financial crisis and asked basic questions about risk, returns, and asset allocation,  compared the responses of 15,000 people from 15 countries including Canada.

Only 13% of Canadians who took the survey answered the questions correctly. The Dutch scored the highest with 21% of respondents answering correctly followed by Hong Kong and Luxembourg at 18%. France, Mexico, and Argentina came at the bottom at 10%, 7%, and 5% respectively.

University graduates had an “edge” if we can call it that over high school graduates, with a mere 20% of post secondary graduates answering correctly while only 8% of high school graduates answering correctly.

It is clear the vast majority of Canadians don’t have a clue about investment and risk. While we have been perceived as a model by many nations by avoiding exposure to risky behaviour and coming out relatively unscathed during the recent financial crisis, it is clear that conservatism may have inadvertently led many to believe that we are actually knowledgeable in our financial affairs.

If you read the newspapers on a regular basis, not a day would go by without a story about how Canadians are increasingly getting into more debt. While in previous recessions the consumer focused on de- leveraging themselves, in this recession we have seen the exact opposite effect. Cheap borrowing rates and government incentives had many people tap into credit to finance renovations. Unemployment remains stagnant, leading those who lost their jobs to live on savings and in cases where the savings were exhausted, to live on credit.

A recent article in the Globe and Mail, published last week I believe, suggested that more and more Canadians simply don’t give a damn about their increasing debt position, let alone their investments. A recent RBC economic report stated that this coming decade more and more Canadians will contribute less to their RRSP.  While one of the main reasons cited was that as more baby boomers head into retirement reduce their contributions, we can’t dismiss the fact that it’s becoming increasingly difficult for today’s working generation to live for today and save for the future.

Should we be surprised? Food prices more than doubled compared to a decade ago. Housing prices in some areas more than doubled compared to a decade ago, forcing home buyers to posted higher down payments and borrow more. Conflicting forecasts from economic research and industry advocacy groups have lead people to make speculative bets in a highly cyclical real estate market. Couple those with stagnant pay levels, more companies shifting retirement responsibility to the employee, and people paying for all the must-have “gizmos” which didn’t exist 30 or 40 years ago and what you get is a future economic picture that isn’t as rosy as we’d like to believe.

Now would be a good time to introduce mandatory financial literacy courses for young students. The old, time-tested habit of living according to your means must be emphasized. Forget buying the latest gadgets that only depreciate in value, forget the daily lattes and coffee runs, forget spending money that you don’t have just because the cost of borrowing is attractive. Put an emphasis on paying down your debts and saving your money. If there’s anything left over, then spend on trivial crap.

But what about teaching adults the concepts of saving and investments? Being that I’m currently working on my CFP designation, given that I do work in the financial services industry, and given that I’ve read dozens of books and hundreds of articles about finance and economics, I can provide you with this simple advice:

Start reading personal finance books written by professionals, NOT the how-to-get-rich-quick scams! For those who believe in that nonsense, the richest people in the world would tell you one thing: building wealth takes time. To add to that I say some people may indeed get lucky, but the odds of success are outright ridiculous. Just how much are you really willing to bet on luck alone? Luck is not a good long-term strategy.

Many of us have read The Wealthy Barber but the reality is it’s not a good investment book. It’s a good book teaching you how to get into the habit of saving and managing your financial affairs more responsibly but it won’t teach you about investments. Here are some books that I have personally read and advise anyone who hasn’t read books on finance and investing ever before to read. These books explain some of the basic concepts of investing as well as the tools of the trade:

1) Smoke and Mirrors (2009 edition) – David Trahair, CA

This book argues for paying down debt before investing and places emphasis on retirement planning than actual hardcore finance. It’s a short read (I read it this past weekend after having it sit on the shelf for a few months) and in my opinion it’s a good start for most new investors.

2) All About Index Funds (2nd edition) – Rick Ferri, CFA

Rick posts on a regular basis on Bogleheads.org and has been a key voice in the indexing community. Index funds (and ETFs) are a very good way to start saving because high quality index funds track the best indices (not all indices are created equal!) while doing away with DSCs and trailers (well, ok, not all of them), require no load fees, have a low MER, and keep turnover to a minimum, thereby minimizing tax liability to fund investors. With index funds you can also invest in specific sectors or asset classes without buying individual securities.

If you don’t have the time or patience to set your allocation and re-balance your portfolio on a regular basis, you can purchase balanced index funds instead. Start by taking the Investor Questionnaire on Vanguard’s website to get an idea about your risk tolerance and read about the benefits of indexing!

3) Save Smarter, Save Bigger – Margot Bai

While she’s not a financial professional, she does have a lot of common sense and I personally found this book to be an entertaining read when it came out 3 years ago. If you are looking to learn about how to budget better and making smarter decisions with your money, this book would be a good place to start. I don’t necessarily agree with everything she says but it’s still a good primer on personal budgeting.

4) The Intelligent Investor – Benjamin Graham

By far the bible of value investing and the book that Warren Buffett calls “the best book on investing ever written.” While written 60 years ago, the principles and discipline it advocates are time tested and would undoubtedly last forever.

These would be my picks where new investors can start. After that you can move to the more advanced stuff. The key is to understand the foundation before heading straight into more complicated readings.  I’m sure there are those who would say there are other books out there but to start these should provide you with enough insight.

It should also be noted that while these books would give you a good start, they are not a replacement for professional advice! Remember: there are no guarantees when it comes to investing. The only advantage you have is time. Markets always go up and down but stay the course and you will fare well in the long run. I know this may come across as a very simplified statement but perhaps investing is easy after all.

Random thoughts: who do I really work for?

When I first started in the business, one of the first things I did was thoroughly research my competition. And that includes, among bank websites, the websites of other mortgage agents and brokers. On one hand I don’t really see myself as a competitor because many ethical brokers and agents have the same or hopefully similar principles as me when it comes to the future of the broker industry in Ontario. We all want the broker channel to succeed and gain more market share. On the other hand, we’re vying for competition even among ourselves, so in that sense we really do compete with one another.

The broker channel has come a long way in the past two decades. Speaking to brokers who started when the industry was at its infancy, today’s brokers, myself included, may take things for granted simply because of how the system is integrated these days. Impersonal, cheesy websites with almost zero personal contribution from the agent or broker are now everywhere. Electronic filing systems replace good old pen, paper, and fax.

A lot of people in the business choose to become order takers by teaming up with real estate offices and processing in-house applications to get the deal done asap and make the office a few more dollars rather than act as true consultants. In my view, as this industry has grown, the conflict of interest has grown with it. The only difference is that today, the new stricter government regulation, that conflict of interest must be declared.

Back in 1980’s, mortgage brokers were subject to little regulation and were usually sought by people who didn’t qualify for a mortgage through the banks. The market share for mortgage origination through a broker was well under 5%. Today, brokers not only continue to service people who don’t meet the criteria of the banks but also present a formidable competition to actual bank branches. We capitalize on the banks’ weakness: emphasize we’re not the puppets representing fat cat bankers and offshore share holders who just don’t give a damn and a dedication to expert advice, simplicity, flexibility, and service.

The market share for mortgage brokers has increased significantly over a short period of time. From originating under 5% of all mortgages in the late 80’s to over 30% today. In fact, in 2008 CMHC stated in its annual consumer report that 50% of first-time home buyers got their mortgage through a broker.

Could it perhaps be because the banks are treating young, first time buyers as dodos? If I can only count the number of times young professionals who were embarking on their first purchase came to me with a pre-approval from their bank at POSTED rate.  Needless to say that was hopefully the first and last time their bank got their mortgage business.

Anyway, back to researching the competition. One of the things I noticed was a lot of agents and brokers were claiming they were working for “you” as in “you” the client. I must admit I find that characterization a bit misleading. Yes, we’re all trying to make sales but at the same time why not look at the service you’re offering more objectively.

As a mortgage agent, I’m basically there to represent ALL the parties in the transaction, hence the neutrality factor. I’m essentially retained by my client, I practice under my brokerage’s license, and I’m paid by the lender (in most cases). So in that sense, I represent everyone: the client, the brokerage, and the lender.

So why not emphasize that?

Apparently some brokers and agents think that this “feel good” kind of language I talked about above will bring them more business. “We don’t work for the bank – we work for you!”  True. But not entirely. In return for bringing that client to the lender, you’re paid a finder’s fee. It doesn’t matter whether it’s a chartered bank, a trust company, a credit union, or a private investor. You’re paid by the lender. So in that sense, you’re indirectly working for them.

But you’re also working for your client. After all, the client retained you to represent their interests. They EXPECT you to represent their interests. If all they wanted was a rate, all they have to do is walk to their branch and nag the $30,000 a year personal banker. They’d walk in for a mortgage and come out with a mortgage, insurance, mutual funds, saving account, GIC, and even a pen as a souvenir.

Another party you represent is the brokerage. In Ontario, every independent agent or broker can only work in the business if they are registered under a registered brokerage. In other words, I can’t register myself with FSCO. My brokerage has to register me and I have to be on the brokerage’s errors and omissions insurance policy in addition to having my own valid license to practice.

My brokerage alone does a lot of business with key lenders who own a significant market share. Yes, I’m bragging! So what? We enjoy top status (top single %) that other larger brokerage networks don’t enjoy (though they’ll never really tell you this). It’s also one of the reasons why I don’t even bother posting my rates. To me the rate is irrelevant because I know that I get the best. I’d rather emphasize service, flexibility, and commitment over rates.

But to get these rates you have to maintain good relations and you can’t waste anybody’s time. When you deal directly with underwriters and BDMs, you’re not just representing yourself. You’re representing the brokerage. Do a few slip ups and the whole brokerage may pay the price. It’s the same thing when you deal with your clients. You’re not just representing yourself. You’re representing your brokerage. You must have respect for their time. You have an image to maintain.

So next time you run into an agent or broker who claims to be representing “you”, ask them why they emphasize that. The reality is it’s our job to look after everybody’s interests. And that’s what makes me impartial. It’s not the fact that I don’t work directly for the lender that makes me that. It’s the fact that in some way I do work for the lender. Without the lender there won’t be a mortgage. And I also work for the client because without the client there won’t be a mortgage. And I also work for the brokerage because without the brokerage there won’t a mortgage.

When representing all these parties, I must put their interests ahead of my own. Impartiality at its best I think.

Deal of the week: matrix and variable rates

Flagship deal: 5-year fixed @ 3.79% with prime + .60% HELOC

** Must fund by March 2, standard prepayments

5-year fixed: 3.89% full 120 days rate hold

5-year ARM: 1.95%

Have a great weekend! Coming very shortly:

  • Mortgage penalties paper, revised edition (this will be available by download only)
  • Mortgage insurance guide

Using your mortgage to make an RRSP contribution

March 1, 2010: that’s the deadline to making your 2009 RRSP contribution. Sometimes, however, we don’t always have the money at hand to make a lump sum payment. With equity markets continuing to rally and interest rates remaining low for the next 2 quarters, it may be worth considering borrowing for the short term to shelter long term gains.

There are several ways this can be accomplished and the strategies outlined below can be used to fund either your entire contribution or only part of it:

1) Borrow the funds from your HELOC: the Bank of Canada reiterated its position last week to keep rates low until the second quarter of this year barring an unexpected rise in inflation. HELOC rates are presently between prime + .5% to 1% (2.75%  to 3.25%) depending on the institution.

Borrowing for the short term would allow you to make an immediate lump-sum contribution while taking advantage of extremely low interest rates. And what’s best, you can tax-deduct the interest on the revolving portion as long as the funds are used for investment purposes. Consult an accountant if it’s a joint HELOC account.

2) Cash-back mortgage: If you’re renewing an existing mortgage or in the process of closing on a home, you can obtain a cash-back mortgage. Lenders are not oblivious to RRSP season and with today’s promotional offers you would be able to get upwards of $6,000 on a $300,000 mortgage (5-year term) at very low rates.

3) Matrix mortgage: If you’re renewing an existing mortgage or in the process of closing on a mortgage, with this mortgage you can unleash your equity position in the property and use the HELOC to make the contribution. Both the mortgage and HELOC would be with the same institution. Again, given that interest rates would likely increase by the end of this year, I would advise borrowing from your HELOC on a short term basis. You never want to be highly leveraged when the cost of borrowing starts creeping up.

RRSP reminders:

  • The maximum contribution limit for tax year 2009 is $21,000
  • Unused contribution room from 1991 to 2006 can be carried forward
  • Your deduction limit would be specified on your CRA NOA received last year
  • Your deduction limit depends on your MTR

Donating to the Haiti Disaster

The pictures on the news over the last few days are terrifying. We are lucky enough to live in a country that can sustain and rescue itself from disaster. These poor people in Haiti, on the other hand, can’t and relief organizations need all the help they can get. The best help at this point is money.

I already donated a total of $100 to UNICEF and Médecins Sans Frontières

I know from the stats about 200 people read this blog on a given day. Please consider donating a similar amount. Tax receipts would be issued for donations of $10 and over.

Watch for scams that contact you by email asking for donations. No relief organization would ever contact you by email! You have to go on their website and make a secure donation using your credit card. Don’t ever give your banking information to anyone by email. It is a scam!

Prime – .30% 1.95%

Email me for details!

3-year variable rate term

Purchases up to 95% LTV, refinances up to 90% LTV

No switch unless you pay the legal fees

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Canadians risk averse when it comes to their mortgage, 86% take a fixed rate in 2009

The age old debate: should I take a variable rate mortgage or a fixed rate mortgage?

According to an article appearing in today’s Globe and Mail, most Canadians have an easy answer.

CAAMP, one of the leading organizations representing independent mortgage professionals in Canada, said that 86% of mortgages issued in 2009 (by CAAMP members I’m assuming) were fixed-rate mortgages. Variable rate mortgages appear to be maintaining a small market share despite record low interest rates.

According to the article, 70% of those who took a fixed rate opted for a term of 5 years or more.  I remember reading CMHC stats a few months back referring to 2006 figures. It reported that approximately 70% of fixed rate mortgages issued in Canada are 5-year terms. 7 and 10-year terms, on the other hand, are a small minority, as are the shorter maturities

It should come as no surprise that the market share for variable rate mortgages has not increased even with today’s very low rates. Most people who never had a variable mortgage and are not familiar with volatility of rates resetting every month in an environment of increasing interest rates managed to resist the hype (sic) about the attractiveness of variable rates while they are at an all-time low.

Historical studies, namely Professor Moshe Milevsky’s 2001 paper titled “Floating Your Way to Prosperity”, argues that floating the rate on a mortgage on a long term basis would pay it off faster than a fixed rate, saving the borrower money by reducing the amortization and interest costs. The inherent problem with variable rates is the volatility factor tied with the borrower’s current cash-flow. When interest rates increase over the short term, the borrower’s income more often than not stays the same. As such, to ensure that they would be able keep up with payments,the borrower’s present income must be subjected to a stress test by playing out a scenario where prime would increase to 5, 10, and even 15% respectively (we’ve seen prime at 16% in the 80s and there’s no reason to assume that we won’t ever see it again at that level).

While 15% prime is certainly an extreme case, it’s best to prepare the borrower for the worst. If the borrower’s income falls within the lender’s debt service ratios when we exacerbate the prime rate, then it can be assumed the borrower would fare off well against the volatility of a variable rate mortgage.

Assumption, however, doesn’t necessarily provide the full picture. We must also ask whether the borrower is fiscally responsible in handling their day-to-day finances as this plays a key factor in servicing future debt. For example, what is the borrower’s current debt habits? What happens if the borrower loses their income while rates increase (does the borrower have disability insurance)? Does the borrower have an emergency fund to sustain the increasing payment amounts (or make a lump-sum payment if their mortgage goes into negative amortization) if he or she lose or see a reduction of their income? What is the borrower’s present risk tolerance and what are his or her’s future goals? Do they plan on remaining in the same home for the duration of the term or do they plan on moving earlier (variable rate mortgages come mainly in 5-year terms while fixed rates mortgages provide a wider array of maturities)? Do they have any significant expenses that would have to be paid during the term (i.e. child’s tuition, placing a parent in a retirement home, etc.) which may affect their cash-flow to service increasing mortgage payments? While most variable rate mortgages can be converted into a fixed term mortgage at no cost, some lenders enforce conditions: a certain time period must lapse into the term and once converting to a fixed rate, the borrower must commit to a closed minimum term (which may or may not interfere with future plans).

All of these elements must be taken into account as part of the stress test to determine whether the borrower would benefit from a variable rate mortgage.

If we take CAAMP’s latest figures into account, it appears that the majority of Canadians are not ready to play Russian roulette with their mortgage and would rather pay the rate premium in exchange for predictability and easier time planning existing cash-flow.

Goodbye low rates, hello recovery

Two key developments are happening now that may impact your cost of borrowing in the coming months:

First, the US Federal Reserve has come out with a plan to stop purchasing mortgage-backed securities (MBS) by the end of March. Since the plan’s inception in January 2009 to alleviate pressure off of Fannie Mae and Freddie Mac’s balance sheets, stabilize sinking housing prices and keep mortgage rates low, the Fed together with the US Treasury purchased over a trillion dollars worth of MBS.

With the US economy showing signs of improvement, albeit at a subdued rate as fundamental figures demonstrate, the Federal Reserve is pushing ahead with a plan to stop the purchase of MBS in the next two months. According to the Wall Street Journal, proponents of the plan at the Fed argue that purchasing over a trillion dollars of MBS over the past year diminished enough supply from the private sector to keep mortgage rates low even after the Fed stops purchasing these securities.

Perhaps unsurprisingly, there is no shortage of opponents to the plan on Wall Street. Some fear that the Fed is withdrawing its support too soon and that such an abrupt move can cause interest rates to spike and already battered housing prices to weaken further. The interest rate on a 30-year mortgage in the US has already increased in the weeks leading to the Fed’s decision. The 30-year rate now stands at 5.20%, up from about 4.70% back in early December.

The Fed’s decision to buy MBS have also pushed down on the yield on US Treasury bonds and kept the spread between comparable T-bills and MBS at a mere 70 basis points. With the Fed stopping its purchases, the spread between both securities would undoubtedly increase, raising the prospect for a hike in mortgages rates. What is not yet known is the extent of the damage. Some argue it would be severe given the fragile state of the US economy while others side with the Fed by claiming any ill-effects will be negligible. I know that last sentence is somewhat simplistic and vague but at this time all I can say is stay tuned to see whether this story would have global ramifications.

You may be asking yourself how this would affect us in Canada. The simplest explanation is our economy is closely linked to the US economy. When the US economy was brought to its knees during the most recent financial turmoil, other national economies followed in a domino effect. Despite our conservative lending standards, we too felt the pain. While Canada’s banking sector remained strong throughout much of the ordeal, it was not immune to losses, and Canada’s overall economy did end up being dragged into a recession that forced governments into deficits.

Our own “Fed”, the Bank of Canada, have already indicated they will raise the overnight rate that prime is benchmarked to in the second quarter of this year. Last month, in fact, Canada’s big banks released their projections for where they believe rates would head. TD, for instance, stated that the overnight rate would be 3.25% by 2011. Add to that the 2 to 2.50% premium lenders add minus let’s assume the increment that my discount lenders are providing now (-.25%) and you’ve got a variable mortgage rate of around 5% within a year now, or about a 3% increase over where rates are today. And that’s with inflation under control. Should inflation spike, we’d probably be looking at much higher rates.

At this point it’s all speculation. Financial forecasting is never easy. Recall that at a time Finance Minister Jim Flaherty was saying that Canada’s books would still be in the black even though we were in the midst of the worst recession since the Great Depression. TD came out with a report shortly afterward forecasting that Canada would actually post a $14 billion deficit in 2009. Turns out that $14 billion would’ve been a bargain considering that we’re now over $50 billion in the red, and our deficit is projected to balloon to $150 billion (according to today’s Toronto Star) by 2014. So TD’s researchers got it right that we would be posting a deficit despite all the optimism floating around at the time, but their target was well short of reality. Of course, at the time we didn’t know just how much stimulus Ottawa would be providing and how much it would ultimately cost. But it goes to show that certain credibility should be given to at least some projections provided by leading institutions. And if these latest rate projections prove accurate, Canadians should look forward to more normal (higher, that is) interest rates in the coming years but much sooner than they may think.

Second point takes us to a land of beauty and serenity and perhaps most appealing to bankers, neutrality and a secure place to hide money.  A key meeting of the Bank of International Settlements took place in Basel, Switzerland over the weekend. The BIS, which maintains a rather low profile in the media, is an association of central banks where key members are essentially the central banks of the world’s richest countries: The Federal Reserve, the Bank of England, the Bank of Japan, and the ECB to name a few. Canada is represented on the Board of Directors by Mark Carney, Governor of the Bank of Canada. While the BIS holds regular meetings among members to discuss various agendas, this particular meeting saw the executives the world’s biggest banking institutions come under scrutiny for what the BIS believes is the return of excessive risk-taking by banks in the face of historically low interest rates and a resurgent stock market.

The BIS wants members to supervise banks more closely by implementing “macroprudential” policies that would measure the impact of risk-taking behavior of large financial institutions on the banking sector as a whole as opposed to the financial state of individual companies. That’s because as we saw during the most recent financial crisis, no bank was safe from toxic assets. The fact that no one knew just how many toxic assets the other party had on its balance sheet produced a domino-like liquidity crisis that led to the collapse of hundreds of banks in the US and spurred massive government bailout packages around the globe to keep markets afloat.

Why should we care? The banking system in any free market economy is tightly linked and as we have learned all too well over the past 2 years, the reckless actions of a few will have consequences that would affect millions in so many pervasive ways.