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Tuesday, April 20, 2004

Interest Rates, Inflation & The Bank of Canada

by PJ Wade

Most Canadians would acknowledge the importance of interest rates to their current and future financial security, but almost as many would also admit they do not know as much about Canada's monetary system as they should. Those who buy, own and sell real estate benefit from learning as much about the way money works as possible. The Bank of Canada, our Central Bank, is a good place to start.

Although the media have trained us to link the Bank of Canada with an increase or decrease in mortgage rates, our Central Bank does not set the prime rate, commercial banks do. The Bank of Canada does influence interest rates, especially short-term interest rates, when it sets the Target for the Overnight Rate. This is the average rate that the Bank wants to see in the marketplace, where the major financial institutions and large corporations lend each other money on a very short-term -- or "overnight" -- basis. Fluctuations in this rate influence other interest rates and the rates that financial institutions charge on loans and mortgages.

Changes in the Bank of Canada's Overnight Rate Target usually lead to changes in the "prime rate." The prime rate is the reference point for interest rates charged on many personal loans, mortgages and business loans, as well as interest paid on deposits and investment certificates. Since the Bank has pre-set dates for changing its Overnight Rate Target, you might plan your financial activities around these announcements since mortgage rates may rise or drop shortly after these announcements.

Over the years, the Bank of Canada has refined the way it conducts monetary policy. Previously, the Bank Rate was the official interest rate that Canadians could follow. Now, the Overnight Rate Target is considered more relevant for monetary policy and it is also the best rate to use when comparing our interest rates with those of other countries. The Overnight Rate Target corresponds to the U.S. Federal Reserve's "target for the federal funds rate," the Bank of England's two-week "repo rate" and the minimum bid rate for refinancing operations (the repo rate) at the European Central Bank.

The Bank of Canada was founded in 1934 as a privately owned corporation. Four years later, the Bank became a federal Crown corporation where the federal Minister of Finance holds the entire share capital issued by the Bank. The Bank "promotes the economic and financial well-being of Canada" by establishing monetary policy, supplying quality bank notes and overseeing Canada's financial system.

To influence the amount of currency in circulation and the interest rates, the Bank sets monetary policy, measures taken by the Bank to influence the economy by regulating the amount of money in circulation and by keeping inflation "low, stable and predictable." The Bank's Monetary Policy Report is a detailed summary of the Bank's policies and strategies, plus a look at the current economic climate and its implications for inflation, which may be useful in establishing your own real estate investment strategies. This Report is published semi-annually in April and October; regular updates are published in July and January.

According to the April 2004 Monetary Policy Report, the Bank expects the economy to grow by about 2 3/4 per cent in 2004, picking up to about 3 3/4 per cent in 2005. Core inflation -- which removes the most volatile components of the consumer price index and the impact of indirect taxes on the remaining components -- should average 1 1/2 per cent over the remainder of this year. As excess supply in the economy diminishes, core inflation is expected to move back to 2 per cent by the end of 2005.

Would you like to see the effects of inflation from 1914 to the present? Try out the Bank's Inflation Calculator. Or perhaps you want to know the effect of inflation on your investments and savings.

The Bank of Canada may make an off-beat contribution to your financial future, and therefore your real estate buying power, through the unclaimed balances it holds. As of December 31, 2003, approximately 789,415 unclaimed balances, worth some $227 million, were on the Bank's books. Is some of that yours?

Published: April 20, 2004

Related Articles:

Household Debt Warnings Are 'Myths' Says Bank Study

Eroding Affordability: A Canadian Pattern

Moving On Up: Canada's Shifting Housing Market

Canadians Who Keep More Achieve 2004 Real Estate Goals

"The Canadian Connection"

PJ Wade, The Improvement Coach, is a business strategist and an internationally recognized authority on retirement and the Maturing Marketplace (= baby boomers and seniors). PJ's firm, The Catalyst, provides strategic communication and educational services to the financial, healthcare and housing sectors - and the clients they serve.Author of 6 books and over 850 published articles, PJ's current books are Have Your Home and Money Too, "the owner's manual for your home," (Wiley, ISBN 0-471-64400-5) and Caring for Your Aging Parents (Coles, ISBN 0-7740-0613-7). PJ is a widely-known and often-quoted financial commentator and a popular strategic speaker. For more, visit http://www.thecatalyst.com.

Copyright © 2004 Realty Times. All Rights Reserved.

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Weeping Building Parts: What's All The Fuss About?

by Bill Ball

In the course of a home inspection, the inspector is looking at many components that are supposed to weep(1).

"Weep holes," as they are called in the trades, are openings that should be found at the base of all exterior siding -- including stucco, wood and composite siding, and brick veneer -- to drain away moisture that gets behind the exterior finish. Even when present, landscape grading and soil that is not held below the base of these sidings or veneer can block the weeping and can trap moisture behind the exterior finish.

The absence of these weep holes is what trapped moisture behind the EIFS (Exterior Insulated Finish System) stucco products of the 1980's and 1990's over which many class action lawsuits have been filed. The trapped water rotted away the framing behind the EIFS in as little as three years in one subdivision in North Carolina.

Another place weep holes are observed is at aluminum windows. The lower track of these windows is supposed to have weep holes facing out to direct moisture (from rain or condensation) that gets inside the track to the exterior. It is surprising how many times I have seen windows (original installations, but particularly replacement windows) installed backwards with the weep holes facing the interior of the house and even upside down with the weep holes on the top of the window.

Anywhere that condensation can occur, weeping drains are necessary. That's why a furnace with air conditioning should have a condensate drain plus a collection overflow pan under the unit with an overflow drain -- both pipes running to the exterior.

Very often ceiling stains are NOT roof leaks, but condensate stains. Homeowners will occasionally install a new roof to address these "leaks" which turn out to be dripping from condensate of the air conditioning evaporative coil at the furnace located in the attic.

Condensation also occurs in the attic on cold surfaces during the winter months. Metal pipes and framing anchors are common sources from which I have seen evidence that they were dripping onto the ceiling below. Condensate drips also occur in summer months on uninsulated A/C lines in the attic and poorly drained evaporative coils (as in the case above).

Weeping holes are also critical at retaining walls. At the base of any wall designed to retain soil behind it, the most important issue is what to do with the weight of water that accumulates there. The first sign of a failing retaining wall is efflorescence caused by water leaching through the wall. The simple solutions are either weep holes or a footing french-drain behind the wall that drains to daylight.

The footing drain is best because it is less likely to silt-up. Weep holes installed at the base of a retaining wall must be protected from silt, or very quickly (three or four years) they will become clogged. This is particularly true of the weep holes designed into masonry walls by leaving out mortar at vertical joints at the base of the wall.

Unless a home inspector is looking for the failure of weeping components, s/he is probably not well trained. To determine professionalism, try asking your prospective home inspector if his/her report addresses "weeping."

(1)Source: Uniform Home Inspector's Code BookTM

Published: April 20, 2004

Related Articles:

How To Deal With Carpet & Window Sill Stains

Pressed Board Siding Solutions

Planters: Telltale Signs Of Water Damage

Three Causes Of A Common Plumbing Nightmare: "Water Hammer"

Which Homes Have "Exotic" Materials?

Dryer Vents Can be Hazardous to Your Health

Bill Ball is a skilled and inspirational instructor, author, columnist, and call-in talk-radio host. Bill has over 35 years experience in all phases of construction and real estate with experience in the construction of more than 1,800 custom homes including architectural design, construction, financing, marketing, and inspection. For the last 15 years he has focused on the field and is proud to call himself a Home Inspector. Bill is publisher of the UNIFORM HOME INSPECTOR’S CODE BOOKTM. Contact him at - AskBillBall@aol.com

Copyright © 2004 Realty Times. All Rights Reserved.

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Is Real Estate Defying Financial Gravity?

by Peter G. Miller

If you like good news it would be hard to outdo the release issued on Friday by the National Association of Home Builders.

"Housing starts increased to a seasonably adjusted annual rate of 2.007 million units in March, the Commerce Department reported today. The pace was 6.4 percent above February's upwardly revised rate of 1.887 million and 15.2 percent above the March 2003 pace."

Better than 15 percent in a year?

Let's have some perspective. Last year, 2003, was astonishingly good for both the national economy and the real estate industry.

Existing home sales reached 6.1 million units, a record and up 9.6 percent from the year before, according to the National Association of Realtors (NAR).

A typical existing-home cost $173,200 in December 2003, according to NAR. That was up 6.7 percent from a year earlier.

"Total new single-family home sales for 2003 reached 1.085 million, up 11.5 percent from the previous annual record of 973,000 in 2002," according to the National Association of Home Builders.
Is it reasonable for real estate sales and prices to keep rising, now that the economy seems to be in a rebound mood?

The answer is not especially clear. A growing economy is likely to be associated with rising interest rates, and interest rates have been the engine behind much real estate activity in recent years.

In the past few weeks, Freddie Mac says rates climbed from 5.52 percent to 5.89 percent, both with .6 points. The result, according to the Mortgage Bankers Association, is that loan applications dropped 22 percent in a week.

It's obvious that 5.89 percent is higher than 5.52 percent, but is this difference really enough to reduce mortgage applications by a fifth? This hardly seems warranted.

If you look at mortgage rates during the past 20 years or so it's tough to ignore the overwhelming pattern: Rates have more-or-less trended down over time, reason enough to finance with an adjustable-rate mortgage (ARM).

In 1984, for example, the slow-moving and consumer-friendly 11th District Cost of Funds rate reached 11.039 percent in August of that year versus the current 1.841. If you take the index, add a 2.5 percent margin, it means a borrower 20 years ago was paying 13.539 percent versus 4.341 percent today.

Given today's mortgage rates, it's hard to imagine that eight percent was once a bargain, seven percent was the find of a lifetime or that six percent was even feasible.

It may be that first-time and middle-age buyers and borrowers simply have no frame of reference other than the ever-falling rates seen in the past few years. To such folks, the "steep" rate rise seen earlier this month must seem somewhat scary, or at least contrary to the usual pattern.

But rates must eventually rise at some point. Will the real estate marketplace simply shut down when interest levels "zoom" to 6.5 percent or, shudder, 7 percent?

The answer is "no" and here's why: Even when rates have been ridiculously high homes have still sold -- and prices have risen.

In 1984, for example, typical home prices rose 3 percent and 2,829,000 existing units were sold according to the National Association of Realtors. Interest rates? In July and August of that year the prime rate hit 13 percent.

I suspect that when interest rates rise again it will be an evolutionary process rather than a quick jump of one or two percent. The result will be rate shock for those who do not remember the past -- or that real estate is a long-term investment.

There's little doubt that low interest rates inflate real estate sales. But beyond mortgage levels there are other reasons to buy homes -- the desire to live indoors, the potential for appreciation and the possibility of refinancing at low and better rates in the future.

Should rates begin to rise again watch successful investors in your community. Odds are that if the local population is growing, savvy investors will be in the marketplace -- buying. After all, it's tough to find homes today for $72,400 -- and that was a typical selling price in 1984.

For more articles by Peter G. Miller, please press here.

Published: April 20, 2004

Related Articles:

Mortgage Rates Creep Up As News Continues To Encourage Confidence In The Economy

Home Buyers Should Benefit From New Free Credit Report System

Greenspan May Not Be Right About ARMs

Mortgage Rates Reach Seven Month Lows This Week

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Mr. Miller welcomes your questions, comments, and news releases via e-mail at peter@ourbroker.com.

Copyright © 2004 Realty Times. All Rights Reserved.

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