Dear Clients, 

Excellent weekend coming up for Father's Day.  I lost mine a few weeks ago so make sure you appreciate everything that makes your father special or laugh about what gets your blood pressure up.  It does not last forever.

Basically this update is saying the economy south of the boarder is already starting to falter due to the government stimulus drying up.

In Canada the housing market is slowing which is what they wanted by increasing drastically qualifying requirements.  From the report attached below, in Canada the at risk group are the families making 50,000 or less and they are already at too high debt servicing so maybe they should not have been into a purchase from the beginning or their income has decreased due to job loss, divorce, retirement etc. with insufficient pension and investment income (going to get worse).

This is why at The Personal Mortgage Group when you are up for renewal or making ANY changes on your mortgage we look at the total picture so when you do reach retirement you are not in the "retired into poverty" statistic.   Sometimes it just takes an hour of time to prevent this very unfortunate situation.  You do not want to wait until retirement as the mistakes have been made and it is too late to rectify.

I would say almost all of my clients are moving well into the right direction of having total freedom during your retirement but you know a lot of friends and family who are not getting the proper direction.  So just another reason for you to refer them to us!

Happy Father's Day to all

Fixed Rates  

3 yr 3.95%

4 yr 4.39%

5 yr 4.49%

Suzanne Boyce
Broker\ Owner

NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS

There are already early signs that point to the non-linear nature of the current recovery in both Canada and the US.

• Excluding the one-off impact of census related hiring, overall employment growth in the US during May was very weak.


• Retail sales fell by 1.2% in May. Sales tumbled at building supply stores, reversing more than half the surge of the prior two months. As well, auto sales show a notable softening.


• Overall mortgage application volume, which includes loans for purchases and refinancing, dropped by more than 12% during the week ending June 4, compared with the previous week. Refinance volume tumbled 14.3%. This is the lowest level in more than 13 years-a clear sign that the housing market is struggling without government incentives.

These observations are consistent with our call that overall US growth in the second half of the year and early 2011 will be on the soft side. This suggests that the Fed will not touch rates until probably the second quarter of 2011.

Note that the temporary lift from the government has led to a reversal of the deleveraging process by American households in recent months. For example, the saving rate is now at 3.4%-down from 5.4% in the second quarter of 2009. Even more interesting is the difference in savings among income groups. The savings rate of Americans with income of more than $100,000 fell to the level seen before the recession. At the same time, those who earn less than $100,000 managed to increase their saving to a 20-year high. As well, credit is starting to rise, but even here we have to take a closer look. Total revolving credit (credit cards) was down by $8.5 billion while non-revolving loans (car and mobile homes) were up by $9.5 billion. This suggests that banks are very selective in their lending practices which, in turn, lead to some improvement in the quality of credit.

In Canada there are clear signs that the housing market is softening. Housing starts are slowing, while supply of existing houses is outpacing demand. This raises the issue of the quality of mortgage credit in Canada, and how significant will higher rates will be impacting the market as a whole.

Note that the vast majority of home owners in Canada regardless of their age have not experienced any worsening in affordability despite the rapid increase in prices. The only sub-group of households that have seen some deterioration in their affordability position is older Canadians with average income of less than $50,000. Zooming in on this group we find that on average they spend close to 60% of their gross income on mortgage payments, property taxes and electricity costs. This is three times the average ratio seen among households at the same age groups but with income of over $50,000. Note, however, that as opposed to the situation in the US and to a common misconception, the share of this vulnerable group in total mortgage holders in Canada is on the decline-currently accounting for Just over 13% of all mortgages in Canada, down from 19% five years ago. Also note that the share of the least vulnerable group (older/higher income) is on a clear upward trajectory. The practical implication of this finding is that the composition of the mortgage market in Canada has, in fact, improved over the past few years.

Interestingly, there is no significant difference in affordability between households with fixed rate mortgages and those with variable rate mortgages. While variable mortgage holders enjoy lower interest rates, the average mortgage they carry is 7% larger.

While one cannot ignore the risk of an outright decline in home prices in the coming 12-18 months, nothing in the data supports a market crash. As opposed to the US, the share of mortgage holders in Canada has in fact declined in recent years, while the increase in the average size of mortgage has not coincided with a significant worsening in affordability. While higher interest rates will clearly erode affordability, our detailed look at the distribution of mortgage payments as a share of income does not reveal major pockets of vulnerability. Accordingly, the most likely scenario is that higher interest rates will lead to a modest decline in prices (probably in the magnitude of 5%-10%) in the coming year or two. But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years-paving the way for a healthier housing market by mid decade.

Benjamin Tal