Canada’s lending industry is witnessing rock-bottom interest rates and unrelenting competition.

The former has fuelled borrowing volumes. The latter has been known, on occasion, to encourage looser lending criteria.

Together, the two can be destructive to a banking system and economy.

That’s why OSFI (Canada’s banking regulator) is being proactive. In a speech today, OSFI head Julie Dickson laid it out like this for financial institutions:

• Low rates have likely “increased the incentive for consumers – again – to borrow. Banks also have an incentive to lend, given low margins and the need to compete.”
• As a result: “…We, at the OSFI, have been very focused on home equity lines of credit, and mortgage lending by institutions – both insured and uninsured books.”
• “The message from OSFI to financial institutions is that…institutions should guard against loosening historical underwriting standards – for example, by moving to higher loan-to-value ratios or waiving any due diligence requirements.”
• FIs must protect against imprudent lending “more so than they have historically.”

After her speech, Dickson told reporters:

• “I think the concern is that the conditions are such that there would be tremendous pressure on banks to loosen [lending] standards.”
• As a result, OSFI is “stepping in to increase the monitoring” of lender portfolios.
• “I think it’s prudent to increase [FI] capital levels as soon as we can.” (This was in response to a separate question on the new Basel III capital/liquidity standards.)

Dickson also noted that OSFI is presently cooperating with the international Financial Stability Board to develop global guidelines “for what constitutes safe mortgage lending.” That includes down payment, loan-to-value and income verification parameters.

Despite the warning, Dickson acknowledged that Canadian banks have “managed risk” well to date, adding that Canadian FIs are in “a position of strength”.

ROME— Globe and Mail Update

In Asia, the Nikkei 225 lost 2 per cent and the Shanghai Composite was down 2.8 per cent. Most commodities, gold included, were down significantly. Copper prices, which are often viewed as a proxy for global economic growth, lost 4.6 per cent, taking them to a year low.

The market was gyrating so furiously that it produced some extraordinary spectacles. For instance, Germany’s 5-year credit default swaps, a measure of the cost of insuring sovereign bonds against default, hit a record high even as German bonds, considered Europe’s safest debt, dropped to a record low yield of 1.7 per cent.

In Europe, the banks and mining companies bore the brunt of the selloff. Every bank and miner of any size opening lower on Thursday. French banking giant BNP Paribas lost more than 5 per cent, taking the one-week loss to 24 per cent and the 6-month loss to 56 per cent. Italy’s UniCredit shed 3 per cent, for a six-month loss of 64 per cent.

Investors fear that the European banks lack the capital to absorb the twin threats of a slowing economy and a Greek default. In an interview with France’s Le Figaro, Michel Barnier, the European Union’s financial services commissioner, that he can’t rule out the possibility that some European banks will need bailouts.

Among the mining companies, Xstrata, the Anglo-Swiss diversified miner that owns Canada’s Falconbridge, lost 8 per cent as investors took the view that global growth will get crunched as the debt and banking crises intensify.

In Europe, the factor that seemed to be propelling the markets downward was particularly bleak data from the newest purchasing managers’ index, or PMI. The index, which is widely followed, declined to 49.2 from 50.7 against a consensus of 49.8, leaving it at the lowest level since mid-2009, when the financial crisis was still in full swing. “The current index level indicates that the euro zone recovery has ground to a complete halt,” ING Bank’s Martin van Vliet said.

The manufacturing and services indexes also fell, adding to the doubts about the sustainability of the global recovery that seemed to be in place early this year.

In a note, RBC Dominion Securities said the PMI slowdown may force the European Central Bank to reconsider its current no-easing policy. RBC said that “with a euro area recession now a distinct possibility, that position will come under renewed pressure.”

The European markets were bound to fall Thursday if only because the Fed’s “Operation Twist” damaged market confidence, even though its immediate goal – flattening the yield curve by pushing down long-term interest rates – worked. In announcing the US$400-billion operation, the Fed signalled “significant downside risks” to the American economy. The warning triggered a retreat from growth-focused investments.

The global market selloff is expected to make companies reconsider financing plans. On Thursday, China’s Sany Heavy Industry, a maker of construction machinery, postponed its $3.3-billion (U.S.) offering on the Hong Kong market, citing weak market conditions. Hong Kong’s Hang Seng Index has fallen 22 per cent this year.

OTTAWA — Canada’s annual inflation rate increased to a higher-than-expected 3.1% in August from 2.7% in July, in part due to higher prices for passenger vehicles and electricity, Statistics Canada data reported on Wednesday.

Market analysts had expected the annual rate to hit 2.9% in August. Prices grew by 0.3% in August from July, greater than the forecast 0.1% advance.

The data is unlikely to put much immediate pressure on the Bank of Canada, which expects inflation to gradually fall toward its 2.0% target.

The central bank, citing economic woes in Greece and the United States, made clear on Tuesday it was in no hurry to raise interest rates from near-record lows.

The annual core inflation rate, which excludes volatile items like gasoline, grew 1.9% in August from 1.6% in July.

Energy prices rose 13.4% during the 12 months to August, following a 12.9% increase in July. The price of passenger vehicles increased by 0.3% in the 12 months to August, compared with a 1.0% drop in the year to July.

Food prices climbed 4.4% in the year to August, compared with 4.3% in July.

OTTAWA — Canadian household debt continued to rise in the second quarter as individuals took out more mortgages at historically low rates and obtained consumer loans, Statistics Canada said on Tuesday.

More than 22 years after finding bestselling success with The Wealthy Barber, financial guru David Chilton is back with a non-fiction follow-up. The Wealthy Barber Returns is arguably the best financial planning book since, well, since The Wealthy Barber.

The lifelong Kitchener, Ont., resident has departed from the fictional setting of the original, maintaining what he terms his “stage voice” — a folksy, witty tone honed over countless speeches. So readers expecting the return of the fictional Sarnia barber, Roy, may be disappointed that character is not the wealthy barber who is returning.

“I quote him [Roy] a few times,” Chilton says in an interview, “His advice was smarter: he ended up right.”

Given that so many others (including me) have imitated Chilton’s fictional format, it seems strange he has switched gears, but his timing has always been impeccable. The fact is the phenomenal success of the first book (more than two million copies have been sold) means Chilton himself has become the wealthy barber, supplanting his fictional creation. As with the original, the cover sports a full-length photo of Chilton and the red-white-and-blue barber pole that’s part of his powerful image.

Chilton acknowledges that he has “become the barber. One guy introduced me as the only author who became his character. No one calls Herman Melville Moby Dick.”

Even though it’s self-published, Chilton’s clout and genius for marketing have assured him widespread bookstore distribution. It’s in stores now, from Chapters to a spot I can confirm personally, a small independent bookstore in Bayfield, Ont.

Judging by initial testimonials, he’s hit another grand-slam home run. Luckily for us other authors, this is only the second time he’s stepped up to the plate.

As explained in the introduction, he was long reluctant to follow up the original because it was “the only good idea” he had, one he’s been “milking” for the better part of two decades (typical of the charming self-deprecating wit he maintains throughout).

But after a detour into co-publishing cookbooks, he decided North Americans are still nowhere close to absorbing the central message that they’re not saving enough. Except for a fortunate minority in employer-provided defined-benefit pensions, or the even rarer few who marry rich or win lotteries, most of us will have to save significant chunks of our income to achieve financial independence at a decent age.

The long-awaited sequel makes it clear there’s no magic bullet that can substitute for consistently saving for retirement, year in and year out. Most need to save till it hurts. Recognizing that most people find it near-impossible to save, Chilton tries to shift their focus to spending less, which amounts to the same thing. In clear and witty prose, he makes a compelling case for lifelong frugality or what I call guerrilla frugality. Forget the fancy stuff: If you can’t save by consistently spending less than you earn, retirement is just a pipe dream.

I’ll spoil one chapter, titled Four Liberating Words, by revealing they are “I can’t afford it.” I’m not a big fan of tattoos, but in the case of some acquaintances I know, I’d consider tattooing that phrase on their foreheads.

Chilton goes out of his way to avoid repeating key concepts from his earlier book, although the pay-yourself-first message of the orignal pervades the sequel in concept if not the actual phrase. I didn’t notice a repeat of the succinct Be an Owner, Not a Loaner — his original stance on emphasizing stock ownership rather than bonds — but he continues to see the value of a diversified portfolio of quality dividend-paying stocks.

However, the mutual fund industry and other proponents of “active” security selection will not be happy the new book joins the growing ranks of passive “indexers,” whether through index mutual funds or exchange-traded funds (ETFs). Nor will the insurance industry be ecstatic that Chilton has not recanted his previous stance in favour of low-cost term insurance rather than costlier whole-life or permanent insurance.

The book is divided into two sections, the first devoted mostly to the need to save more. The second half is a potpourri of short unconnected chapters on various aspects of investing, covering everything from pensions to tax-free savings accounts to wills and estate planning.

Chilton devoted the better part of the past year to the book, bouncing it off multiple experts (notably Mercer’s Malcolm Hamilton) and media pundits. The result is a book parents and teachers should provide to students late in high school or as they enter the work force.

As I note in a back-cover blurb, it’s the kind of book the federal Task Force on Financial Literacy should be distributing — except for the troubling fact its chairs are from the life insurance industry and actively managed investment firms.

Ironically, the first chapter of the original was titled The Financial Illiterate. Too many North Americans are still financially clueless and as Senator Pamela Wallin notes on the front cover of the sequel, Chilton has returned “just in time.”

Just not Roy the barber.

Watching the Bank of Canada’s language on the economy change over the past year is like seeing a healthy, upbeat person gradually come around to the idea that a serious illness is overtaking them.

A year ago, the central bank was continuing the slow process of raising its key interest rate toward familiar levels, as the western world began to put the financial cataclysms of 2008 behind it. On Sept. 8, 2010, the target rate for overnight loans between banks rose to one per cent.

And here’s how the world economy looked to the Bank of Canada — getting better, but though not steadily: “The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies,” the Bank of Canada said in September of 2010.

And Canada’s economy — buoyed by demand for commodities like oil, gas, uranium and fertilizer — was recovering: “The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity,” the central bank’s statement read at the time.

It was canny, however, about forecasting any further increases in rates, sensing possible trouble ahead: “Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

That was code for don’t get too excited, folks: a lot could still go wrong — and it did.

Remember that for more than a year, from April 2009 to June 2010, the central bank’s key rate had been 0.25 per cent — effectively zero, or maximum stimulus, as a rising Canadian dollar did some of the bank’s inflation-cooling work and the world began to recover its appetite for Canadian commodities.

The bank had gradually increased its key rate over the next few months to 0.75 per cent. Then came the bump to one per cent exactly a year ago.

Since then, as Europe’s debt problems have flared in Greece, Ireland, Portugal and Spain, and in some people have taken to the streets to protest government attempts to curb spending and remain solvent, the Bank of Canada’s key rate has been rock steady at one per cent.

Now watch how the language has moderated, as central bank economists saw the economy flattening:

On Oct. 10, leaving the rate at one per cent, the bank said: “In advanced economies, temporary factors supporting growth in 2010 — such as the inventory cycle and pent-up demand — have largely run their course and fiscal stimulus will shift to fiscal consolidation over the projection horizon .… The combination of difficult labour market dynamics and ongoing deleveraging in many advanced economies is expected to moderate the pace of growth relative to prior expectations. These factors will contribute to a weaker-than-projected recovery in the United States in particular.”

By Dec. 7, it saw recovery “largely as expected,” but sounded the first note of bigger trouble ahead: “At the same time, there is an increased risk that sovereign debt concerns in several countries could trigger renewed strains in global financial markets.”

On Jan. 18, 2011 — happy new year! — there were signs the economy was rebounding all too well, with government spending in the U.S. and Canada showing up in growth all over. As well, Canadian commodities remained hot sellers, pushing up the value of the Canadian dollar.

In fact, the bank said, “the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.”

Translation: “No need to raise interest rates.”

On March 1, the recovery kept pushing ahead, driven by exports, but the bank left rates unchanged, and stuck with this now-boilerplate paragraph at the end of its release: “This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”

On April 12, the bank forecast 2.9 per cent gross domestic product growth in 2011 and 2.6 per cent in 2012 — all good, with robust spending and business investment leading investors to “become noticeably less risk-averse.”

And yet, searching the horizon for clouds, the bank saw enough to stick with its boilerplate: “This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”

By May 31, however, the bank began to see some of its more horrible imaginings coming true, and the boilerplate was dropped. Again leaving the key rate at one per cent, the bank said global inflation might be growing, but “the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

Stimulus might be “eventually withdrawn,” it said, but “such reduction would need to be carefully considered. “

On July 19, the bank’s language noted slower-than-expected U.S. economic growth, Japan recovering at a lower-than-expected pace from its nuclear disaster, and said “widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets.” In other words, investors were getting jumpy about how Europe might pull itself together without major defaults and weakened currency.”

And on Wednesday, laying out all the factors that are besetting global growth and the Canadian economy, the bank finally sounded a doctor facing a sick patient.

It didn’t explicitly suggest returning to more stimulus (lowering interest rates), as some economists had forecast it might, but the bank no longer expected to withdraw economic stimulus:

“In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.”

By Mary Gazze, The Canadian Press

Canada’s national housing agency says it expects home sales and construction activity will cool but remain healthy in the second half of the year, due to favourable economic conditions that push up demand for homes.

Canada Mortgage and Housing Corp. said Monday that lower unemployment, a steady level of immigration, and low interest rates are working together to prop up Canada’s real estate industry.

“I think the Canadian housing market is healthy at the moment despite the uncertainty we observed in the financial market,” Mathieu Laberge, deputy Chief Economist at CMHC said in an interview.

He was referring to the stock market ups and downs earlier this month as investors worried about the European debt crisis and feared the U.S. could slip back into recession.

“Employment is expected to grow at a moderate pace in the next few years,” he said.

“We expect interest rates to remain flat for the remainder of the year and increase in 2012, and new immigration is an addition to demand in the housing market.”

Laberge said the CMHC predicts the market sales volumes will hold at a stable level next year.

Canada Mortgage and Housing Corp. said low unemployment, immigration and low interest rates led to fewer claims in the first half of the year under its mortgage insurance programs, which protect lenders from defaults by borrowers.

The agency said it expects fixed mortgage rates to stay relatively flat for most of the year, with the five-year posted rate at between 4.1 per cent and 5.6 per cent, then increase slightly in 2012.

CMHC said variable rate mortgages would remain near historically low levels, although some banks recently increased their variable rates to reflect the higher cost of raising money.

Prices of homes shown on the Multiple Listing Service are expected to grow only slightly going forward because the supply and demand for resale homes will likely stay in balanced territory, CMHC said.

A least one analyst agreed that the real estate market should stay fairly healthy for the rest of 2011, but said it’s already cooling slowly and home prices may decline in the longer term.

“What you’re probably looking at is a period where prices are relatively flat, maybe a little bit lower in the next few years,” said Adrienne Warren, an economist at Scotiabank who specializes in the real estate industry.

“Affordability from a price perspective has deteriorated and that’s going to have to, over time, come back to more normal levels but it doesn’t imply that that has to happen quickly as a type of correction that occurs quickly.”

She said interest rates are low and attractive right now and encourage first time home buyers to enter the market, which drives up prices. Once those rates begin to rise — likely in the second half of 2012 — the current price of homes will become unaffordable for many, putting downward pressure on future prices.

In its report Monday, CMHC said changes to mortgage rules introduced by the federal government earlier this year played a part in reducing mortgage interest payments and allowed Canadians to build equity in their homes faster.

Canadians are finding it easier to pay off their mortgages, with arrears levels improving and the volume of mortgage insurance claims lower than expected.

In March, the federal government put through new rules that reduced the maximum amortization period to 30 years and cut the maximum amount Canadians can borrow to 85 per cent of the home’s value.

After the changes, refinancing activity fell by nearly 40 per cent, which means fewer Canadians took on more debt. Federal Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have repeatedly warned of the dangers of the ballooning debt level of Canadian consumers.

Ten per cent fewer Canadians bought mortgage insurance immediately after the new rules began, and the level was five per cent lower than sales before the changes came into effect.

CMHC also reported its net income for the quarter was $383 million, up $61 million from $322 million in the same quarter last year. Revenues were down slightly at $3.3 billion, versus $3.4 billion.

The agency’s predictions for the rest of the year echo a revised forecast by the Canadian Real Estate Association released earlier this month. CREA said it expected higher national home resales this year, reversing upward its previous forecast of a one per cent dip.

National average prices will be in the range of $347,700 to $374,300, growing to between $349,500 to $385,000 in 2012, CREA predicted.

CMHC said sales of existing homes should range between 429,500 and 480,000 units in 2011 and between 410,000 and 511,900 units in 2012.

Earlier this month, the CMHC said that national housing starts rose to 205,100 units on a seasonally adjusted basis in July, 11.6 per cent higher than the 188,900 reported in the same month last year and 4.3 per cent more than the 196,600 recorded in June.

The uptick, driven by strong construction on condos and apartment buildings in urban centres, is likely due to builders catching up to robust demand last year rather than expectations of coming growth, it said.

Home building activity has been increasing through the first seven months of 2011, but starts are still down 4.6 per cent from a year ago.

Predictions for the Canadian market were in stark contrast with the most recent figures from the United States, which showed that country’s depressed housing market is still trying to get back on track.

The U.S. National Association of Realtors said Monday that its index of sales agreements fell 1.3 per cent in July to a reading of 89.7. A reading of 100 is considered healthy by economists

The association also said a growing number of buyers had cancelled contracts after appraisals showed the homes they wanted to buy were worth less than they bid.

VANCOUVER – Slower job growth in British Columbia’s economy will mean slower increases in home sales and property values through to 2012, the B.C. Real Estate Association said Thursday.

And by the end of 2012, the association expects the high-flying prices in some of B.C.’s bigger markets to show small declines.

Home sales through the realtor-controlled Multiple Listing Service should hit 74,640 by the end of 2011, which is up four per cent from 2010, and then rise to 80,300 in 2012, association chief economist Cameron Muir said in his report.

However, those estimates are below B.C.’s long-term average for sales and the forecast for 2011 represents reduced expectations from Muir’s forecast from earlier this year that B.C. should see 78,200 sales this year.

“Following a decade where unit sales broke all records, consumer demand for the next few years will be relatively moderate,” Muir said in releasing the report.

A positive note, however, is that weaker global economic growth and uncertainty in world financial markets are signals that interest rates, including mortgage rates, will remain low and “help underpin housing demand.”

Across the province, Muir is forecasting that the average home price, which has been heavily influenced by strong sales in the more expensive pockets of Metro Vancouver, to hit $559,179 by the end of 2011.

However, by the end of 2012, Muir is forecasting that the average price will fall back 2.5 per cent to $545,964.

The 2012 price declines, however, are expected to show up primarily in the Lower Mainland Markets, which influence the overall provincial averages.

Muir expects Metro Vancouver’s average price to slip 3.5 per cent in 2012 to $742,000. However, that will be a decline off 2011, which Muir predicts will end with the average price having shot up 14 per cent to $769,000.

And Muir is forecasting that the Fraser Valley will see its average price in 2012 dip 1.4 per cent to $498,000. But that follows 2011, where he expects the average price will have gained 12 per cent from the previous year to hit $505,000.