There are signs the Bank of Canada and the U.S. Federal Reserve are running out of room to deliver further interest rate relief to their economies.
Commercial banks in Canada are showing an increasing reluctance to pass on the central bank's rate cuts, and further Fed cuts are expected to run into opposition from members who are starting to fear inflation more than recession.
REM: Real estate may be leveling off to a more "balanced market" however the balance of 2008 will tell the real storey. We could even begin to see a shift in some Canadian markets in the next couple months since the spring is typically the most active months of the cycle. There are a few items I think will impact the real estate market in the not so distant future: recession fears, the impact of the banks holding back on mortgage rate cuts, fears of global inflation impacting Canada and highly leveraged first-time buyers .
Monday, April 28, 2008
Banks Reluctant To Pass On Rate Cuts
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3 comments:
This is exactly the point I was afraid about. Transmission of lower overnight rates of Bank of Canada to the real economy is not always so clear. Working as a Steveston real estate agent I have experienced this couple of time. Banks are very slow in lowering their rates as a respond to the actions of Bank of Canada and just reluctantly starting more expansive loan policy. Question is: What we have expected? We can clearly see result in US.
There is plenty of talk in the msm about how Canada's mortgage market is different than the US. This may be true from a sub-prime stand point however I believe Canada has its own mortage mess brewing as this report states. "Innovative financing has become key to homeownership in today’s environment – with longer amortization periods gaining favour in 62 per cent of the major centres surveyed. Low or no down payments were popular with first-time buyers in 38 per cent of markets."
Around 70% of interest carrying deposits are deposits of over one year which carry interest at the rate contracted at the time deposit is accepted upto the date of maturity. The cost of funds remains unchanged and high in spite of drop in Repo Rate. Very few Banks borrow very rarely at Repo rate. Therefore a drop in Repo rate may not result in lower overall cost of funds. Therefore if Banks reduce lending rate their Net Interest Margin and hence their profitability may get adversely affected. (2) Many NPA A/cs become NPA due to factors beyond the control of the borrowers ( like shutdowns and erratic supply of power, delays in acquisition of land, existing tenants not vacating despite title the property having been acquired, buyers including public sector buyers defaulting in settling their dues in time, long delays in disposal of court cases). This causes erosion in the earnings of Banks. No doubt there may be cases of advance accounts becoming NPAs due to diversion of funds, willful default or even incompetence and lack of resourcefulness on the part of managements of businesses or enterpreneurs. But in most cases it is not corruption of Bank Management that makes Bank debts bad or NPAs.
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