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Bank of Canada’s economic cheer will be painful for some: Don Pittis

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This column is part of a series we’re calling Debt Nation looking at the state of consumer debt in Canada. Look for more coverage in the coming days, including on mortgages and credit card debt.

The Bank of Canada has sounded a warning that borrowing costs could start rising even faster. And that was after hiking rates yesterday for the fifth time since last summer.

While tacking on an additional quarter of a percentage point to the cost of borrowing yesterday, Bank of Canada governor Stephen Poloz and his deputy Carolyn Wilkins were as optimistic as they have been about the state of the economy.

Of course for over-borrowed Canadians a strengthening economy is always a double-edged sword. After years of low rates needed to perk the economy up, clear signs of strength mean rising rates. 

And hidden amidst the careful tone and dreary presentation essential to any sober central banker, Poloz and Wilkins were almost upbeat.

Bad news is good news

“Higher interest rates are always difficult when people haven’t seen them for a long time,” said Wilkins at yesterday’s news conference to discuss the bank’s latest Monetary Policy Report.

“But when they’re coming at a time when the economy is growing and it’s a sign we’re getting back to a more normal phase, in a lot of senses it’s good news.”

There are still risks to the economy including the Chinese-American trade war and the possibility that Canadian borrowers could buckle under rising rates, but overall the mood, by central banker standards, was buoyant.

International currency traders noticed one thing in particular that helped drive the loonie higher. It was the removal of the word “gradual” from the statement on the expected path of interest rate changes.

Despite plenty of back-pedalling by Wilkins and Poloz on the subject, seemingly fearful of giving too much away, it seemed clear that the Bank of Canada wanted to prepare markets, and Canadians, for the possibility of more and faster interest rate increases.

Over-borrowed Canadians could begin to buckle under rate hikes, but so far evidence collected by the Bank of Canada shows the moderating housing frenzy has made that less likely. (Don Pittis/CBC)

While insisting that those faster rate moves could be up or down depending on economic conditions, Poloz revealed that his intent was to correct the impression in the financial sector — which he referred to as “the street” — that the bank was locked into creeping rate hikes even if a quicker pace were needed.

“Markets seem to have settled on “gradual,” meaning we would only move every second meeting,” responded Poloz to a reporter’s question. “To put it most bluntly, that’s what I heard from the street, and we thought, well, we really don’t want to reinforce that as a locked-in mechanical expectation.”

A statement like that gives the bank an air of unpredictability, keeping traders on their toes, and gives fair warning that Poloz and Wilkins have the flexibility to move quickly to block an unexpected increase in prices or wages.

Read more stories in the series:

​COMING FRIDAY:

  • Don Pittis explains why credit card debt can be a dangerous trap

Exceptional risk 

Although the bank is predicting that inflation will continue at a moderate two per cent, the economy is operating at or near capacity, meaning there could be a sudden surge, not uncommon in the late stage of an economic boom, in the price of labour and other business essentials.

In the strange language of central bankers such a boom is seen as “an upside risk” that the economy will do even better than they are expecting.

One of the reasons for the bank’s current tone of optimism is that the North American trade deal has been settled, a worry in previous outlooks. Despite recent market turmoil, the U.S. economy continues to do well and while it may falter once the fiscal stimulus of taxes and spending run out, Wilkins says stimulus could launch a long-hoped-for surge in “animal spirits.”

Despite recent turmoil on securities markets, the Bank of Canada expect the U.S. economy to be robust. (Brendan McDermid/Reuters)

“The U.S. economy seems to be exhibiting some animal spirits,” said Wilkins. “You get into this virtuous circle where businesses have good demand and they become more confident and they invest more.”

Another upside risk — in other words, great news for the economy but bad for borrowers — would be if China and the United States were able to settle their trade battle in some sort of amicable way. 

But until that happens, the Bank of Canada has declared that now that North American trade has been settled, the fight between the world’s two biggest trading nations remains the biggest downside risk to the global, and to the Canadian, economy.

Also a risk on the down side is that the bank discovers rising rates are overwhelming so many over-borrowed Canadians that their economic hardship begins to feed back into the wider economy with a steep fall in house prices or a sharp decline in spending.

Rates to double?

But the bank’s research so far has shown that is unlikely. The mortgage stress tests that some real estate tycoons complain have killed the market mean house prices are no longer rising at absurd rates of 20 per cent a year, said Poloz. That means a slowdown in the panic of “FOMO, the fear of missing out,” that in recent years has led new home buyers into bidding wars, he says.

Essentially, the bank says that current low interest rates are still stimulating the economy in a way that is likely unwarranted now that the economic crisis that began in 2007 is over.

A strong, normal, economy means interest rates must continue to rise until they reach the “neutral rate” the level of interest that neither stimulates nor impedes regular economic activity. The neutral rate is an economic concept, not a hard figure, but the bank estimates Canada’s neutral rate could be as high a 3.5 per cent — double current interest rates. 

“I get it that it can be difficult for some,” conceded Poloz. “But the reality is that the economy is running at its capacity and is no longer needing stimulus.

“And it’s our job to prevent the thing from overheating and creating inflation pressures down the road.”

Follow Don on Twitter @don_pittis

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Couple from Toronto buys dream home in Mushaboom

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MUSHABOOM – A couple who lived and raised a family in downtown Toronto developed a five-year plan in 2015 to purchase their dream home.

In September they moved into the home – located on Malagash Island in Mushaboom on Nova Scotia’s stunning Eastern Shore – that met and exceeded their best dreams for their retirement.

The Camerons, Bruce and Tanya, decided in 2019 they would explore the Maritimes to see what real estate was available to become their potential retirement home. In the spring of 2020, during a global pandemic, the real estate boom hit their city, and they were hearing the same for Nova Scotia. Our province was their first-choice for attaining their desire for an entirely different lifestyle – away from the busyness of the city.

“We had $300,000 to $350,000 as a home value in mind to buy. Our semi-detached located off Danforth in Toronto was priced at $850,000. We wanted to come out ahead, so we would be secure in retirement,” Tanya said.

Their century-old home had prime location near the subway and GO Transit Line for a great 13-minute commute downtown.

“We enjoyed our community,” explains Bruce “… we had great neighbours, young children around and street parties – lots of social activity.”

Bruce says, “Our agent suggested a starting quote of $899,000. We did not do any renovations and only some staging. Fifty couples went through and we received four significant offers. Six days later we sold – with zero conditions – and a price of over a million dollars. We just requested a closing of September 2020 to get the kids off to school – which we got.”

The couple got more than they had anticipated.

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Real Estate

Rabobank Announces Leadership Changes in U.S., Canadian Offices

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NEW YORK, Dec. 16, 2020 /PRNewswire/ — Rabobank, the leading global food and agribusiness bank, has appointed two of its top executives, Tamira Treffers-Herrera and Robert Sinescu, to become Co-Heads of North American Client Coverage, positioning the Bank for future growth in the region.

Treffers-Herrera has also assumed the role of Vice Chairperson and Head of the Atlanta office, where she additionally oversees Rabobank Mexico, which is led by Eduardo Palacios. Sinescu is the Head of the Chicago office, and also oversees Rabobank Canada, led by Marc Drouin, who was recently appointed as Canada’s General Manager.

Treffers-Herrera and Sinescu report to David Bassett, Head of Wholesale Banking North America, the Bank’s corporate and investment banking business for the region based in New York.

“Both Tamira and Robert have a demonstrated history of strong leadership, operational excellence and passion for our clients,” Bassett said. “Their broad experience and deep sector expertise will be invaluable in delivering dynamic results for clients while accelerating our growth trajectory in North America.”

Each office will have an even greater focus on key Food & Agribusiness sectors and clients: The Chicago office will drive growth in sectors including Dairy, Farm Inputs and Grains & Oilseeds, which are also key areas of focus for the Canada office. The Atlanta office will focus heavily on sectors such as Animal Protein, Beverages, Sugar, and Supply Chains, which are important sectors in Mexico as well.

“Rabobank is fully committed to our clients throughout North America, and we believe our new sector-focused coverage will improve our ability to provide knowledge-based, value-added solutions that benefit our clients,” Bassett said.

Treffers-Herrera was most recently based in London as CEO of Rabobank’s European Region from 2016-2020, where she took the organization through Brexit. Prior to that, she worked in the Atlanta office from 2002-2016. During her tenure in Atlanta, Treffers-Herrera served as Global Sector Head – Consumer Food & Beverages, and prior to that she was a senior banker for a portfolio of large beverage and consumer foods clients. She holds a Bachelor of Arts degree from the University of Kentucky, a Master of Arts from the Patterson School of Diplomacy and International Commerce and has studied at The University of Chicago Booth School of Business and Harvard Business School.

Sinescu has been with Rabobank for over 21 years and was previously General Manager of Rabobank Canada, where he oversaw all operations, business development, commercial strategy and relationships with regulators. In addition, he continues to serve as CEO of Rabo Securities Canada Inc. Prior to Canada, he was a senior banker, Head of Corporate Banking, European Sector Head for Sugar, and a member of the Management Team for Rabobank France. He holds a Bachelor of Science in Business from the Bucharest School of Business, a Master of Business Administration & Management and a Master of Science in Banking and Corporate Finance from Sorbonne University in Paris, and has studied at Brown University.

Drouin has worked with Rabobank’s Canadian team for more than nine years and most recently served as a senior banker, Head of Rabobank Canada’s AgVendor Program and a member of Rabobank Canada’s Management Team. He brings extensive wholesale banking experience within the Dairy, G&O, CPG and Supply Chain sectors. Drouin holds a Bachelor of Arts degree from McGill University and a Master of Business Administration in International Finance, Marketing and Management from the Schulich School of Business at York University.

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Real Estate

Greybrook Realty Partners & Marlin Spring Brand Jointly Owned Asset Manager – Greyspring Apartments

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TORONTO, Dec. 14, 2020 (GLOBE NEWSWIRE) — Greybrook Realty Partners and Marlin Spring are pleased to announce the new branding of their jointly owned investment and asset management firm, Greyspring Apartments. With a portfolio of more than 2,000 units and CAD$375 million in assets under management, Greyspring Apartments is focused on the acquisition and repositioning of multi-family assets throughout Canada.

The new name and branding is an important step in Greyspring’s evolution as an independent operating business. Formed in 2018 by long standing-partners Marlin Spring and Greybrook Realty Partners, Greyspring Apartments was established with the goal of building a leading asset management firm with a robust portfolio of residential rental real estate assets in primary and secondary markets across Canada.

Greyspring’s talented team of real estate, asset management and finance professionals is overseen and guided by the Management Board, whose members include Benjamin Bakst, CEO, Marlin Spring; Elliot Kazarnovksy, CFO, Marlin Spring; Sasha Cucuz, CEO, Greybrook Securities Inc.; Peter Politis, CEO, Greybrook Realty Partners; Chris Salapoutis, President & COO, Greybrook Realty Partners; Ashi Mathur, President, Marlin Spring; and Karl Brady. In addition to his role on the Management Board, Karl Brady leads Greyspring Apartments as its President. 

“We are pleased to announce the official name and branding of a business we formed with our partners at Marlin Spring a few years ago,” said Peter Politis, CEO, Greybrook Realty Partners. “Greyspring has been diligently focused on the execution of strategic value-add programs across its portfolio that are improving the quality of housing for tenants and overall asset values. For Greybrook investors, expanding from our core business in real estate development to the value-add space through Greyspring, has allowed us to provide our clients with investment opportunities that diversify their real estate investment portfolios.”

“Marlin Spring and Greybrook have partnered on many residential real estate projects in recent years,” said Benjamin Bakst, CEO and Cofounder, Marlin Spring. “To a great extent, Greyspring illustrates our approach to partnerships. We believe in, and strive for, responsible growth through deepening our relationships with our trusted partners. With Greyspring, we’ve formalized our focus on providing better and more affordable living experiences for Canadians. This vision aligns with our mission to deliver exceptional real estate value to all our stakeholders with an uncompromising adherence to our core values.”

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