Rate Estimates Get Chopped

Rate-Prediction-AccuracyWe find rate predictions more fun than astrology (and almost as accurate).

For those who give weight to economists’ rate models, the past month has been intriguing. Our dismal scientist friends seem to be getting ever more pessimistic.

Economists’ 2013 prime rate prognostication, for example, is now 1/2 point lower than it was a little over a month ago.

These are the latest consensus calls from the Big 6 Banks + Desjardins:

Forecast
Yr-end 2012
Chg
Yr-end 2013
Chg
Prime Rate
3.00%
No Chg
3.50%
-50bps
5yr
Yield
1.79%
-38bps
2.69%
-37bps

If the above held true (huge “if”), it would dovetail nicely with something like a short-term 1-year fixed strategy—for those qualified and suited to a 1-year.

Things to note:

  • Forecasts above are for year-end 2012 and year-end 2013.
  • “Chg” = The change (in basis points) in economists’ consensus predictions compared to our last forecast review a month ago.
  • Prime rate is assumed to remain at 200 bps above the overnight target rate in the future.
  • As usual, build in a fat margin of error when evaluating long-term rate projections.

Rob McLister, CMT

  1. The TREB mid-month numbers are out:
    Greater Toronto REALTORS® reported 3,206 sales through the TorontoMLS® system through the first 14 days of February 2012 –up by more than nine per cent compared to the 2,933 sales reported during the same period in 2011.
    The average selling price during the first 14 days of February was $491,493 – up by nine per cent compared to the first 14 days of February 2011.

  2. Re: Interest rates
    Get a coin – heads for increase/tails for decrease – flip it – you will have your answer regarding increase or decrease depending on how the coin lands.
    This method is just as accurate as economist’s assumptions.

  3. TREB provides the following disclaimer in their Marketwatch report:
    “In conjunction with TREB’s redistricting project, historical data may be subject to revision moving forward. This could temporarily impact per cent change comparisons to data from previous years.”
    In any case, sales and prices are still ahead of last year’s pace, which was the second stongest year on record for TREB.

  4. Not surprising. Active inventory has been extraordinarily low — January 2012 had the second-lowest inventory of any month since at least 2003. Only December 2009 was lower.

  5. This isn’t a redistricting issue. TREB consistently compares last year’s adjusted ex-cancelled transaction numbers with this years cum-cancelled. Next year, today’s number, less any cancels that come in in the next month or so, will be compared with a number including yet-to-be-cancelled transactions. See any problem with this?

  6. And I should add that the cancels tend to be at above-average prices, thus consistently skewing last year’s average price down compared to this year’s. See for yourself.

  7. @Ralph Cramdown
    Yep. I’ve been watching them fudge their stats for quite some time. They remove sales from the prior year and compare it with seasonally adjusted figures, in which any economist or statistician would agree, this is outright wrong. http://i39.tinypic.com/2ptxb15.png
    Here’s what’s really going on in GTA. http://i40.tinypic.com/wb2b6r.png
    @Rob McLister
    5yr bonds will be below 1% by the end of the year. Flaherty just issued 3 billion in US denominated bonds to deposit into his EFA account at BoC, in turn BoC expands balance sheet and continues buying treasuries and bonds to drive yields down.

  8. You are absolutely correct about active inventory levels at TREB.
    However, while it is tempting to conclude that the chronically low listing inventory is a function of inadequate supply, it must be remembered that in excess of 89,000 listings sold last year, the second highest level ever.
    What we are experiencing in the GTA is in fact extraordinary demand, which has not permitted the listing inventory to expand.

  9. “5yr bonds will be below 1% by the end of the year”
    Unless you’ve got a hot tub time machine I think we can safely dismiss this comment.

  10. Sale/list ratio for Vancouver so far in Feb is 42%.
    Feb 2011 it was 54%
    Ten year average Feb 63%
    But Vancouver has nothing to do with Toronto.

  11. The future of interest rates is always a very good conversation point. In my humble opinion the weight on interest rates of future events (that cannot be predicted) have a

      significant importance in which direction they take
      . So a prediction today is worthless tomorrow if a significant even happens in between.
      Extremely important to focus on your own personal finance vs macro-finance when making a decision about your mortgage.
  12. A combination of the two. Looking at the Jan 2012 active inventory situation, Dec 2011 had the second-lowest level of new listings of any December since at least 2003. Similarly, Jan 2012 had the second-lowest level of new listings of any January since at least 2003.
    To put things in perspective, 3,000 more homes were put on the market in Toronto in January 2007 than were put on the market this past January.

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