Canada Mortgage-Business loans

Housing Boom

2010-03-24T20:29:00.000-07:00

Canada's housing boom will continue this spring as exceptionally low mortgage rates - and the expectation that borrowing costs will soon be headed higher - add a sense of urgency to consumer buying.

A Scotiabank global real estate trends report released Tuesday predicts most Canadian regions will remain sellers' markets for the first half of the year, as strong demand and rising prices continue.

"I think you're going to have a very active spring market, probably some cooling off in the second half of the year," Adrienne Warren, the Scotiabank economist who wrote the report said in a presentation Tuesday.

"We're looking at once in a lifetime interest rates that people are taking advantage of...but certainly confidence is coming back, the job markets are stabilizing," she said.

Scotiabank expects about 510,000 home sales this year, up ten per cent from 2009, but just shy of the 2007 record. Average prices are forecast to increase about eight per cent to a record $345,000, while housing starts are expected to reach 190,000, up from 149,000 last year.

The economic recovery from last year's painful recession has improved consumer confidence, although a bounceback in the jobs market is taking more time. Just over a third of the 417,000 jobs lost in the 2008-2009 recession have been replaced and the jobless rate is still at 8.2 per cent, only half a point below its high last August.

Most experts predict the rise in consumer confidence about the economy, and low interest rates, are behind the continued strength in the housing market.

Warren said the spring rush will be driven by an influx of buyers hoping to preempt tighter lending rules for mortgages and the introduction of the harmonized sales tax in Ontario and B.C. But a steady increase in the number of listings and a rise in construction are helping to restore a more balanced market.

"We're starting to see better balance, we're seeing more listings. There was a real lack of listings for the better part of last year...we're moving back into a better balanced situation," Warren said.

Warren said the hot spring market should give way to more subdued activity in the second half of the year, as higher interest rates and higher home prices erode affordability.

Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.

Key Rate Unchanged

2010-03-03T20:00:00.000-08:00

Canada's central bank held its key interest rate at a record low 0.25 percent on Tuesday and reaffirmed that it expects it will keep the rate steady until July. But the bank also signaled it is getting closer to raising rates.

The Bank of Canada said the 5 percent economic growth Canada saw in the fourth quarter was slightly higher than expected. It said growth has been "spurred by vigorous domestic spending and further recovery in exports" and cited low rates, increased confidence and global growth as reasons.

The bank said the persistent strength of the Canadian dollar and weak U.S. demand continue to act as significant drags on economic activity in Canada. About 80 percent of Canada's exports go to the United States. A higher Canadian dollar hurts exports.

But the bank said the risks to Canadian inflation are now "roughly balanced." Previous statements have said the risks were lower.

Some of Canada's top economists took the bank's changed assessment to mean rates will go up once the conditional commitment ends in July. The Canadian dollar strengthened almost a cent, to U.S. 96.80 cents after Tuesday's statement was released.

Avery Shenfeld, senior economist at CIBC World Markets, said the bank has taken the first steps to set up for a rate hike in July. He expects rates to rise as "as soon as the commitment to keep on them hold until the end of June has passed."

TD Bank chief economist Don Drummond said he thinks the central bank could wait until the September meeting and said he expects Canada to raise rates before the U.S. does.

Royal Bank Chief Economist Craig Wright also expects Canada to raise rates before the U.S. He said Canada's central bank is setting the markets up for an eventual move toward normalizing interest rates with its wording on inflation expectations.

"That to me suggests they are a little bit more worried than they were a short while ago but not enough to shake them off the conditional commitment," Wright said.

Unlike the U.S., Canada has not experienced the failure of any major financial institution. There has been no crippling mortgage meltdown or banking crisis north of the border, where there is greater oversight of mortgages.

The federal government tightened mortgage lending rules last month as historic low rates are raising fears of a potential housing bubble. Wright said some have taken the bank's vow to keep interest rates at an historic low to mean they will always stay that way.

Canada’s Inflation

2010-01-20T06:05:00.000-08:00

Canada’s inflation accelerated less than economists expected last month, staying below the central bank’s target because of lower costs for mortgage interest, natural gas and clothing. Prices rose 1.3 percent in December from a year ago, and fell 0.3 percent from November, Statistics Canada said today in Ottawa.

Economists predicted annual inflation would speed to 1.6 percent from November’s 1 percent, and that prices would fall 0.1 percent on a monthly basis, according to the median estimates of Bloomberg News surveys.

Bank of Canada Governor Mark Carney yesterday kept his benchmark interest rate at a record low 0.25 percent, and said he plans to keep it there through June unless the outlook for prices veers from his forecast.

The bank also said that “considerable excess supply remains” and inflation won’t return to policy makers’ 2 percent target until the third quarter of next year. “For the Bank of Canada, this report underscores the lack of inflation pressure in the economy,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

“It gives the bank ammunition to keep interest rates low later into this year.” The Canadian dollar weakened 1.1 percent to C$1.0433 per U.S. dollar at 7:13 a.m. in Toronto, from C$1.0314 yesterday. Price Declines Natural gas costs dropped 31 percent in December from a year ago, while Statistics Canada’s index of mortgage interest cost declined 4.9 percent.

Clothing and footwear costs fell 0.8 percent. The rise in inflation from a year earlier was led by a 26 percent jump in gasoline costs. Prior gasoline-price declines helped drive the inflation rate below zero for four straight months through September, the longest period since 1953.

The so-called core inflation rate, which excludes gasoline and seven other volatile items, was 1.5 percent on an annual basis in December, unchanged from the previous month. On a monthly basis, core inflation fell 0.3 percent. The Bank of Canada said yesterday that core inflation has been “slightly higher than expected in recent months.”

Economists forecast the annual core inflation rate would be 1.7 percent, based on the median of 26 estimates, and fall 0.2 percent on a monthly basis. The inflation rate was 0.3 percent for all of 2009, the lowest since 1994, Statistics Canada said.

Tighter Mortgage Rules

2010-01-07T05:34:00.000-08:00

Tightening mortgage eligibility rules to prevent a housing bubble may not be such a bad idea, says the founder of Canada’s largest homebuilding company.

“Housing is meant to shelter. Secondly, it is an investment,” Peter Gilgan, chief executive officer of Mattamy Homes, told a luncheon at Wilfrid Laurier University Wednesday.

Gilgan, who was in town to accept the Outstanding Business Leader of the Year Award from Laurier’s school of business and economics, was asked about recent statements by federal Finance Minister Jim Flaherty that Ottawa may increase minimum down payments for residential mortgages to ensure that homeowners don’t face huge bills if interest rates rise.

“It would be a very responsible thing to do,” said Gilgan, whose Mississauga-based company has built several thousand homes in Cambridge, including some in an indoor factory, and has land available for development on the west side of Kitchener.

When people start treating houses “as a derivative,” as some kind of vehicle to make a quick buck, “it creates too much volatility in the market,” Gilgan said.

As for the province’s recent law establishing greenbelts around urban areas in southern Ontario to avoid sprawl, he said builders have to adjust to the new reality. Twenty years from now, all the desirable greenfield land in the Golden Horseshoe will be gone, he said.

Mattamy has enough greenfield land to build on for the next 10 years, he said, but after that it will have to adopt a new strategy of infilling, intensification and redevelopment in urban areas.

Gilgan doesn’t oppose the province’s thrust as long as everyone faces the same rules. “You can throw anything at me. As long as it’s a level playing field, we’ll figure it out.”

The development restrictions in Ontario are one of the reasons Mattamy is expanding into other geographic areas such as Alberta and the U.S., he said.

Since its launch in Burlington in 1978, Mattamy has built more than 47,000 homes in over 100 communities. Fifty per cent of those homes are in greater Toronto and beyond, Gilgan said, with Cambridge accounting for about 10 per cent of that activity.

The company has had mixed success south of the border. It has “dug a little trench” in five American cities and hopes to break even this year. Doing business in the U.S. is different, Gilgan said. While Canadians tend to plan a lot and adopt a cautious approach, Americans plunge ahead much more aggressively, he said.

Gilgan also touched on the company’s efforts over the years to be innovative. During the 1990s, it decided there was a better way to build housing than having the garage as the most dominant feature. It started building houses on wider lots, as much as 36 feet in width, so that more living space could look onto the street.

"We’re providing something more than a house, we’re providing a community.”

“Pocket parks” or smaller green spaces among subdivisions was another popular Mattamy innovation, he said.

“Be really aware of the competition,” he advised young entrepreneurs, but try to do something unique or different.

Gilgan had the audience in stitches when he told them about his daughter enrolling at Laurier 13 years ago. When he came to visit her, she and four roommates were living “in something resembling a house on King Street.” You could put your hand through open space in the front door, he said. “There was no glass there.”

He drove around the neighbourhood and found a house for sale on Ezra Street. With the help of an all-female team of architects and designers, he turned the house into a “chick machine” with five bedrooms, five bathrooms and a giant shoe rack.

He assuaged his guilt over doing this for his daughter with the knowledge that some years later “a greater fool” would buy it. And sure enough, someone did. A few years later he came back when his son enrolled at the University of Waterloo, but the house was already gone. It had been replaced by a residence for 80 students.

“At first I was offended. Then when I did the math on it, I thought, yeah, it makes sense.”

Bank Of Canada Rate Decision

2009-12-07T08:39:00.000-08:00

On Monday, Statistics Canada reports on building permits for October. A month-over-month increase of 1% is expected.

On Tuesday, the Bank of Canada makes its interest rate announcement. Economists expect the target for the key overnight rate to remain unchanged at 0.25%.

Canada Mortgage and Housing Corp. reports on housing starts in November. Economists expect 156,000 starts, on an annualized basis, down from 157,400 the previous month.

On Thursday, StatsCan reports on international merchandise trade for October. A deficit of $700-million is forecast, compared with a $900-million deficit the previous month.

The Bank of Canada releases its semi-annual review of the financial system.

On Friday, StatsCan reports on the new housing price index for October.

U.S. and overseas

On Monday, U.S. Federal Reserve chairman Ben Bernanke speaks to the Economic Club of Washington.

The U.S. Federal Reserve Board reports on consumer credit in October. Economists expect a drop of US$9.3 billion, compared with a decrease of $14.8 billion the previous month.

On Wednesday, the U.S. Department of Commerce reports on wholesale inventories for October. A drop of 0.5% is expected, compared with a 0.9% decline the previous month.

On Thursday, Bank of England monetary policy committee announces an interest rate decision.

The U.S. Commerce Dept. reports on the country’s trade balance for October. A deficit of US$37 billion is forecast, up from a deficit of $36.5 billion the previous month.

The U.S. Department of Labour reports on initial jobless claims for the week ended Dec. 5. Economists forecast 465,000 claims, up from 457,000 a week earlier. Continuing claims for the week ended Nov. 28 are expected at 5.44 million, down from 5.47 million the previous week.

The U.S. Treasury Department releases its monthly budget statement for November. A deficit of US$134.1 billion is forecast, compared with a US$176.4 billion deficit the previous month.

On Friday, the U.S. Labour Dept. forecasts a 1.2% increase, month-over-month, in the import price index in November, up from a 0.7% increase in October. A year-over-year increase of 3% is forecast, compared with a 5.7% decrease, year over year, the previous month.

The U.S. Commerce Dept. reports advance retail sales for November. Economists expect a 0.7% increase. Excluding autos, a 0.4% increase is forecast; excluding autos and gas, an increase of 0.3%.

Separately, Commerce reports on business inventories for October. A decline of 0.3% is forecast.

Mortgage-Interest Deduction

2009-11-24T07:25:00.000-08:00

It has been referred to as an American birthright, the most sacred tax break, something so sacrosanct that the mere thought of tampering with it was unpatriotic.

And Canadian taxpayers have long coveted our southern neighbour's beloved mortgage-interest deduction, which permits U.S. homeowners to deduct their mortgage interest from their income for tax purposes.

While such a policy applied in Canada would be extremely popular, it is unlikely to see the light of day, especially given its role in the recent U.S. housing crisis. Homeowners may have been influenced, at least partially, by the tax writeoff to seek larger homes with larger mortgages.

Last week, Professor Dennis J. Ventry Jr., of the University of California Davis School of Law, presented a paper entitled, "The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest" at a U.S. tax conference.

In it, Dr. Ventry traces the history of the U.S. mortgage-interest deduction "from accident to birthright, from one of many deductible personal-interest items to one of the few left standing, and from a nominal tax offset to the second-most expensive tax subsidy."

He also includes a eulogy to the mortgage-interest deduction that draws on criticisms of the subsidy from two generations of tax reformers and tax policymakers that are more applicable today than at any time during the deduction's nearly 100-year history. Believe it or not, the mortgage-interest deduction was never intended to be a way of promoting home ownership.

Rather, it had its origins in a general deduction for personal interest, which originated in 1913 and has since been curtailed. In Canada, interest expense is deductible only for the purpose of earning income from business or investments. That's why Canadian taxpayers can generally only write off mortgage interest on rental properties.

Perhaps the biggest criticism aimed at the U.S. mortgage-interest deduction is that there is no corresponding taxable income arising from your personal residence to justify the tax deduction. In order to truly rationalize the deduction, many critics argue that homeowners should be required to declare some sort of notional, taxable rental income associated with living in their own home.

Prof. Ventry's paper cites numerous other problems with the deduction, including its role in artificially raising U.S. housing prices, encouraging Americans to buy bigger and more expensive homes. The deduction also disproportionately favours higher-income taxpayers, since the deduction is worth more for those in a higher marginal tax bracket.

But ultimately, the deduction distorts the entire "rent vs. buy" decision by providing what is essentially a tax subsidy to mortgage-laden homeowners at the expense of debt-free tenants and other taxpayers. In his conclusion, Dr. Ventry calls for a repeal of the mortgage-interest deduction, potentially replacing it with a targeted tax credit for homeowners that is unrelated to the price of the home and the amount borrowed.

Quebec Home Improvement And Renovation Tax Credit (HRTC)

2009-11-03T17:51:00.000-08:00

If you meet certain eligibility requirements, you may be entitled to a refundable tax credit for the 2009 taxation year for expenses incurred under a residential renovation agreement entered into in 2009 for home improvements or renovations.

The tax credit is equal to 20% of the eligible expenses in excess of $7,500. The maximum amount of eligible expenses is $20,000 for a maximum credit of $2,500.

Calculator

To obtain an estimate of the tax credit for home improvement and renovation that you could be entitled to for the 2009 taxation year, use the calculator available on the website of the Ministère des finances.

Eligibility requirements

To be eligible for the refundable tax credit for home improvement and renovation, you must:

Own an eligible residential unit located in Québec
Have the qualifying work for improvement or renovation carried out at your principal place of residence
A qualified contractor must be hired to carry out the work under the terms of an agreement entered into after December 31, 2008 and before January 1, 2010.
The expenses incurred to carry out the work must be paid no later than June 30, 2010.

Eligible residential units

An eligible residential unit is a residence built before 2009. The individual who incurs the home improvement or renovation expenses must be the owner (or co-owner) at the time the expenses are incurred. The residential unit must not only be the owner's principal place of residence, but also:

an individual house
a manufactured home or a mobile home permanently installed
a unit in a building held in divided co-ownership
an apartment in a building held in undivided co-ownership or held by a sole owner

Qualifying work

Qualifying work that gives entitlement to the refundable tax credit for home improvement and renovation consists of:

the renovation, modification, improvement, conversion or expansion of an individual's eligible residential unit, including the addition of structures adjoining or incidental to the unit
the work needed to restore a lot to its condition before the work described above was carried out

Examples of qualifying work

Division of rooms (knocking down walls or addition of partitions)
Finishing of a basement, attic or garage
Installation of a fireplace, a heat pump or an air conditioning system
Installation of an alarm system or home automation system
Insulation (including for a garage)
Replacement of the plumbing, electrical system,heating system, air exchange system
Replacement of the roofing, rainwater gutters and chimney
Replacement of doors and windows
Replacement of sewage treatment systems (septic tanks and septic field)
Renovation of a kitchen, bathroom, washroom
Expansion of a house built before 2009
Construction work on structures adjoining or incidental to a house built before 2009

Federal and Provincial Home Renovation ( part 3 )

2009-10-26T06:33:00.000-07:00

Eligible dwellings

An eligible dwelling is a housing unit that is eligible to be your principal residence or that of one or more of your family members at any time between January 27, 2009, and February 1, 2010.

In general, a housing unit is considered to be your principal residence when it is owned by you and ordinarily inhabited by you, your spouse or common-law partner, and your children. This means that any dwelling that you own and use personally could qualify, including your home or your cottage.

Cottages

If you own and use your home and cottage personally, eligible expenses incurred for both
properties will normally qualify for the HRTC. Note that the maximum amount of eligible expenses you can claim for the HRTC is $10,000 per family.

Rental and/or business use of an eligible dwelling
Condominiums and co-operative housing corporations
If you earn business or rental income from part of an eligible dwelling, you can claim the HRTC only for expenses incurred for the personal-use areas of the dwelling.

Condominiums and co-operative housing corporations

For condominiums and co-operative housing corporations, your share of the cost of eligible expenses for common areas qualifies.

Eligibility period

The HRTC is based on eligible expenses for work performed or goods acquired after January 27, 2009, and before February 1, 2010, under an agreement entered into after January 27, 2009, related to an eligible dwelling.

Federal and Provincial Home Renovation ( part 2 )

2009-10-14T08:32:00.000-07:00

Examples of eligible expenses

Renovating a kitchen, bathroom, or basement, windows and doors
New carpet or hardwood floors
New furnace, boiler, woodstove, fireplace, water softener, water heater, or oil tank
Permanent Home ventilation systems, central air conditioner
Septic systems and wells
Electrical wiring in the home, home Security System (monthly fees do not qualify)
Solar panels and solar panel trackers
Painting the interior or exterior of a house
Building an addition, garage, deck, garden/storage shed, or fence
Re-shingling a roof
A new driveway or resurfacing a driveway
Exterior shutters and awnings
Permanent swimming pools, hot tub and installation costs (in ground and above ground)
Landscaping
Associated costs such as installation, permits, professional services, equipment rentals, and incidental expenses
Fixtures - blinds, shades, shutters, lights, ceiling fans, etc.

Note

Window coverings, such as blinds, shutters and shades, that are directly attached to the window frame and whose removal would alter the nature of the dwelling are generally considered to be fixtures and therefore would qualify for the HRTC.

In some circumstances, draperies and curtains may qualify for the HRTC, if they would not keep their value or usefulness if installed in another dwelling. If these qualifying criteria are not met, it is likely that draperies and curtains would not qualify for the HRTC.

Examples of ineligible expenses

Furniture, appliances, and audio and visual electronics
Purchasing of tools
Carpet cleaning
House cleaning
Maintenance contracts (e.g., furnace cleaning, snow removal, lawn care, and pool cleaning)
Financing costs

Work performed by electricians, plumbers, carpenters, architects

Generally, work performed by electricians, plumbers, carpenters, architects, etc. in respect of an eligible expense qualifies.

Family member hired for renovations

Expenses are not eligible if the goods or services are provided by a person related to you, unless that person is registered for the Goods and Services Tax/Harmonized Sales Tax under the Excise Tax Act. If your family member is registered for GST/HST and if all other conditions are met, the expenses are eligible for the HRTC.

Federal And Provincial Home Renovation Tax Credit Programs

2009-09-30T10:36:00.000-07:00

Federal home renovation tax credit ( HRTC)

Only available for the 2009 tax year.\

The Home Renovation Tax Credit is a non-refundable tax credit based on eligible expenses for improvements to your house, condo or cottage. It can be claimed on your 2009 income tax return. It applies to eligible purchases made after January 27, 2009, and before February 1, 2010.

The HRTC applies to eligible expenses of more than $1,000, but not more than $10,000,
resulting in a maximum non-refundable tax credit of $1,350 [($10,000 − $1,000) × 15%].

Who is eligible for the HRTC?

Eligibility for the HRTC is family based. The claim can be split among family members but the total amount claimed cannot exceed the maximum allowable. If two or more families share the ownership of an eligible dwelling, each family can claim its own credit (i.e., each up to $1,350) that is calculated on its respective eligible expenses.

All expenses must be supported by receipts and acceptable documentation. Keep them in case we ask to see them.

Eligible and ineligible expenses :

Considering the extensive number of eligible and ineligible expenses, it is not possible to provide a complete list. The reader is responsible to check the information and make sure he meets all required conditions upon asking the tax credit on his income tax report.

Consult the Internet Site at http://www.cra-arc.gc.ca/tx/ndvdls/sgmnts/hmwnr/hrtc/lgblty-prd-eng.html for the complete lists.

The expenses are eligible when they are incurred in relation to renovations or alterations to an eligible dwelling (or the land that forms part of the eligible dwelling) and are permanent in nature. As a general rule, if the item you purchase will not become a permanent part of your home or property, it is not eligible.

Note :

Some businesses or individuals may assert that certain items qualify for the HRTC. It is important to remember that you are responsible for ensuring that all eligibility requirements are met when you claim this credit on your tax return.

SHOULD I SIGN FOR A VARIABLE OR FIX MORTGAGES RATE?

2009-09-15T07:33:00.000-07:00

The question that all mortgage borrowers ask us most often:

Is it better to opt for a fixed- rate mortgage or variable rate mortgage? For several years, the classic answer was always: it depends on your cash flow and your tolerance for risk, but the variable rate mortgage or short term has been more advantageous in the long term.

Example: During the period 1950 to 2000, a Canadian borrower would have paid on average $ 22 000 in interest over costs on a mortgage of $ 100 000 amortized over 15 years, opting for fixed rate mortgages for five years instead of variable rate mortgages.

The only advantage had been a greater peace of mind that payments are fixed and do not change for five years. Those who felt that this peace of mind was too dearly paid for were right.

This is not necessarily true today, some time ago, you could have negotiate a variable rate at Prime less 0.8%, it currently trades at Prime + 1%, or 3.5% at we are writing these lines, while that we can obtain a term of five years to 3.75%, the margin is very thin.

Data from the Canadian Association of Accredited Mortgage Professionals (CAAMP) show that only 27% of Canadian mortgages were at variable rates in the fall of 2008. However, this increases to 40% for mortgages contracted in the past 12 months. The popularity of variable rate mortgages has increased in recent years. It seems that this trend has accelerated since.

THE FINANCIAL CRISIS THE CHANGE

The most visible impact of the crisis is good for mortgage borrowers. The significant decline in interest rates in Canada and the fall in bond yields led to a reduction in retail rates.

The rate on a fixed-rate mortgage for five years went from 7.25% in June 2007 to 3.75% today, a historic low. Meanwhile, the variable rate cut, which requires a commitment of five years rose from 5.70% to 3.50%.

Housing Affordability

2009-09-09T05:18:00.000-07:00

Home ownership in Canada became more affordable for the fifth straight quarter with modest improvement registered across the country, according to the second quarter housing report released today by RBC Economics Research.

"Following the biggest quarterly improvements on record in the first quarter and continued improvement in the second quarter, the national home affordability level has been restored to pre-housing boom levels," said Robert Hogue, senior economist, RBC.

"However, the recuperative phase of the affordability cycle seems to be drawing to a close with housing prices firming up in many parts of the country and mortgage rates no longer trending downward."

The RBC Housing Affordability measure captures the proportion of pre-tax household income needed to service the costs of owning a home. During the second quarter of 2009, the RBC Affordability measure at the national level improved modestly across all housing segments, as the benchmark detached bungalow moved down to 39.1 per cent, the standard townhouse down to 31.5 per cent, the standard condo down to 26.9 per cent and the standard two-storey home down to 44.4 per cent respectively.

The report found that measures fell at the national level by 0.4 percentage points for standard condominiums and 0.6 percentage points for two-storey homes, detached bungalows and standard townhouses - marking the fifth consecutive quarterly decline in home ownership costs (the lower the measure, the more inexpensive it is to afford a home).

"The leveling off of home affordability is not expected to stop the impressive resurgence in the housing market," added Hogue. "Supply of properties for sale is dropping as demand bounces back, which is working to heat up prices again in many parts of the country."

RBC's Affordability measure for a detached bungalow for Canada's largest cities is as follows: Vancouver 63.4 per cent, Toronto 46.5 per cent, Ottawa 38.6 per cent, Montreal 37.3 per cent and Calgary 35.7 per cent.

The Housing Affordability measure, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an Affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.

Highlights from across Canada:

   -   British Columbia: In the second quarter, housing affordability in
       B.C. eased once again, further extending the downward trend since the
       start of 2008, although homeownership costs are still significantly
       above long-term levels. Sales of existing homes surged by more than
       125 per cent from their cyclical trough early this year. Market
       conditions have tightened and there has been some firming of prices.

   -   Alberta: The biggest cumulative drop in the history of RBC
       Affordability measures in Alberta deepened further in the second
       quarter, falling to levels not seen since before the housing boom.
       Existing home sales soared by more than 60 per cent between April and
       July, fully reversing last year's slide. Tightening market conditions
       should set the stage for some property value appreciation in the near
       future.

   -   Saskatchewan: Affordability has improved considerably in Saskatchewan
       since early last year, but homeownership costs remain above long-term
       averages. Regardless, sales of existing homes rebounded smartly,
       rising by more than 50 per cent since their lows in March. If this
       trend is sustained, property prices can be expected to eventually
       heat up as well.

   -   Manitoba: The notable easing of homeownership costs in the past year
       has fully repaired affordability in Manitoba, compared to historical
       averages. Resale activity ramped up during spring and summer and
       property prices generally maintained their steady upward trend,
       supported by relatively tight market conditions.

   -   Ontario: Solid improvements in affordability in Ontario have
       supported a strong upturn in the market in recent months. All
       Affordability measures are now below historic averages, indicating
       that homeownership costs are at attractive levels in the province.
       The general tone of the market is generally positive, but local
       demand continues to be held back by the tough economic prospects many
       communities in Ontario continue to face.

   -   Quebec: Housing affordability improved once again in the second
       quarter in Quebec, prolonging a trend that has been ongoing during
       the past year. Sales of existing homes surged by more than 40 per
       cent over the cyclical low reached mid-winter. With a more upbeat
       market sentiment and tightening demand-supply conditions pushing
       property values upward, the Quebec housing market appears to be back
       on track.

   -   Atlantic Canada: Rebounding from a relatively restrained downturn,
       housing affordability in Atlantic Canada continues to improve, albeit
       at a more moderate pace than elsewhere in the country. Affordability
       measures have declined noticeably since early last year and now stand
       below long-term averages. Sales of existing homes climbed by more
       than 18 per cent since January and property values increased
       modestly. Overall, Atlantic Canada is enjoying relatively attractive
       affordability levels, which should support housing activity in the
       period ahead.

Managing Your Money

2009-08-31T07:13:00.000-07:00

Financial literacy has nothing to do with how well you score on tests of your knowledge.

You may be asked to define the Rule of 72 (the number of years it takes your money to double at a given interest rate) or the factors that go into calculating your creditworthiness. The problem with such tests is that they're based on facts – and facts change.

A legitimate tax avoidance strategy today can be viewed as tax evasion next year. Soon, you're getting demands from the Canada Revenue Agency for thousands of dollars in back taxes. You can score 100 per cent on a financial literacy survey and still lose money because you put your trust in bad people, companies or investments.

Trust is easily won in Canada.

Take the recent news about Montreal adviser Earl Jones, who's alleged to have spent millions of dollars that his clients gave him to manage.

In photos, the 67-year-old with the full head of white hair looks trustworthy. Clients felt they were in good hands and didn't bother to call the Quebec financial regulator to see if Jones was registered and covered by a compensation fund (which he wasn't). I'm not blaming the victims here. I'm blaming a system that allows financial advisers to operate outside of a mandatory regulatory regime.

Canadians have a sense of entitlement. There's a feeling that government rules are in place to keep us safe from fraud and wrongdoing. If you believe there's a fund to protect you in an insolvency, you'll probably let your guard down and get complacent. You won't take time to check the credentials of those to whom you entrust your savings.

Here's a way to boost financial literacy. Let's make Canadians more suspicious. Let's work on changing attitudes, not teaching more stuff. Let's encourage everyone to ask about the downside risks and the worst possible scenario. Let's develop a checklist of questions to ask – and tick off as answered – before people sign any paperwork or agree to any large purchases.

Questions such as:

What if I get sick or I can't work anymore? Can I get my money back early without a penalty?

What if the company goes under? What if the principals go to jail?

What if the stock market goes down and stays down for a few years?

What if interest rates go down to zero?

What's the worst possible loss I can have on my investment?

You may have to counteract your own optimistic tendencies about returns that look too good to be true. An investment yielding double-digit rates carries more risk than one yielding 2 to 3 per cent.

It won't be guaranteed, for sure, and it won't be a loan.

About 2,800 people in British Columbia fell victim to the Eron Mortgage fraud in the 1990s.

A study by Simon Fraser University professor Neil Boyd found more than a third of Eron investors thought they were providing a loan with a guaranteed rate of return.

Those who saw themselves as lenders lost almost twice as much as those who viewed themselves as investors – an average of about $76,000, in contrast to an average of $43,000.

Decisions to invest often take place without a strong base of knowledge and, most important, without a critical analysis.

"It will ultimately be a well-informed and skeptical investor who is least likely to be victimized by the fraudulent dishonesty" of men such as those behind Eron Mortgage, Boyd concluded.

Next week, do financial literacy and accounting go together?

Rearranging Your Debt

2009-08-25T07:46:00.000-07:00

It has been nearly six months since the Lipson decision, in which the Supreme Court of Canada effectively blessed the debt-swap strategy known as the "Singleton shuffle." But a new court decision reminds us how critical it is when rearranging your debt to do so legally.

After all, in Canada, it's nearly impossible to write off your mortgage interest without some advance planning.

The Singleton shuffle, named after Vancouver lawyer John Singleton's 2001 Supreme Court victory, stands for the notion that you can rearrange your financial affairs to make the interest on investment loans tax-deductible. How you do that is by replacing non-deductible debt with tax-deductible debt.

The case decided last month involved Nina Sherle, who owned a rental property (Property A) with a mortgage on it upon which the interest was deductible. She also owned a personal residence (Property B) free and clear.

She wanted to switch properties. In other words, she wanted to live in Property A as her personal residence and rent out Property B. She stated she didn't want to change her financing strategy, which was to live in her personal residence (soon to be Property A) mortgage-free.

To accomplish this, she mortgaged Property B to pay off the loan on property A. As a result, she was now making interest payments on the new mortgage secured by Property B. She deducted this interest on her tax returns but was reassessed by the Canada Revenue Agency.

The CRA argued that for interest to be deductible, one must look to "the actual, direct use of the borrowed funds" and whether such use was for the purpose of earning income.

Since the mortgage proceeds were used to pay off the loan on Property A, which was to be a personal residence, not an income-producing property, the interest was not tax-deductible.

The judge in the case agreed. He wrote: "Why funds are borrowed is irrelevant.... It is the use of the funds that governs [the decision]. In the present case, the required link between the use of the proceeds and the income-producing property is just not there."

In a twist, the judge went on to describe what Ms. Sherle could have done to permit the interest to be deductible. While somewhat complex, it essentially involves Ms. Sherle selling Property B to a friend in return for a promissory note.

The next day, Ms. Sherle could have borrowed money from the bank to pay off the mortgage on Property A. She then could buy back Property B from her friend, financing that purchase through a mortgage on Property B.

Her friend would take the proceeds from the sale of Property B and use them to repay the promissory note. Finally, Ms. Sherle would use the proceeds from the promissory note to pay off the bank loan.

Confused yet? The end result is that only the mortgage on Property B would be outstanding. The interest should be tax-deductible since the direct use of the mortgage proceeds was It has been nearly six months since the Lipson decision, in which the Supreme Court of Canada effectively blessed the debt-swap strategy known as the "Singleton shuffle." But a new court decision reminds us how critical it is when rearranging your debt to do so legally.

After all, in Canada, it's nearly impossible to write off your mortgage interest without some advance planning.

The CRA argued that for interest to be deductible, one must look to "the actual, direct use of the borrowed funds" and whether such use was for the purpose of earning income.

Since the mortgage proceeds were used to pay off the loan on Property A, which was to be a personal residence, not an income-producing property, the interest was not tax-deductible.

Her friend would take the proceeds from the sale of Property B and use them to repay the promissory note. Finally, Ms. Sherle would use the proceeds from the promissory note to pay off the bank loan.

Confused yet? The end result is that only the mortgage on Property B would be outstanding. The interest should be tax-deductible since the direct use of the mortgage proceeds was to buy the rental property.

Canada home resales

2009-08-17T09:11:00.000-07:00

Sales of existing homes in Canada posted their biggest year-over-year gain in two years and rose for a sixth straight month in July, as low interest rates and an improving economy tempted buyers back.

In a first look at third-quarter sales, the Canadian Real Estate Association said on Friday that 50,270 homes changed hands in July, up 18.2 percent from the same month last year.

It was the first time that sales topped 50,000 units in July, and the number was 3.9 percent above the previous record for the month, set in 2007, the industry group said.

On a seasonally-adjusted basis, home sales rose at a slower pace in July, up 2.5 percent. Sales rose nearly 9 percent in June.

"National resale housing market activity continued on its upward trend in July, but its pace slowed from fullout sprint in months prior down to that of a 5K run," said Pascal Gauthier of TD Economics.

The report is the latest evidence that consumers are venturing back into the home market after a slump triggered by the recession. Low mortgage rates and signs that the worst of the slump is over are stimulating the market.

The association said demand is rebounding sharply in some of Canada's most expensive markets and that distorted the national average price upward. The average July resale price rose 7.6 percent from a year earlier to C$326,832 ($299,846).

"The difference in the resale housing market now, compared to the beginning of the year, is night and day, and nowhere is this more evident than in the West," said CREA president Dale Ripplinger.

Resale activity in Vancouver, British Columbia, surged 90 percent in July from a year ago, while Alberta cities Edmonton and Calgary posted a jump in sales of 28 percent and 22 percent, respectively.

New listings nationwide continued to fall, down 13 percent to 73,444 units from a year ago. Eight provinces reported higher prices, as did 18 of the 25 largest cities.

Mortgage Window

2009-08-10T07:10:00.000-07:00

After a recent spike seen in mortgage rates, some consumers are wondering whether they've missed their chance to refinance into an ultra-low rate.

Fear not: While the conforming 30-year fixed-rate mortgage hit a daily average of 5.81% last Thursday, it averaged 5.53% on Tuesday, And it's possible that rates could continue to fall.

"Predicting interest rates is like predicting who is going to win the World Series in January," said Guy Cecala. That said, he calls the recent spike "somewhat of an aberration," and expects rates will continue to drift down.

Why the recent run-up in rates? Over the past month or two, "the economic skies have brightened somewhat," Gumbinger said in an email, and the threat of "trillion-dollar budget deficits for the foreseeable future, the potential for significant inflation, and few clues as to how the government might extricate itself from intrusions into markets" created a landscape that was not appealing to investors.

But now, rates are retreating partly because inflation doesn't seem as immediate a threat as investors feared, Cecala said. In his opinion, nothing fundamentally has changed in the economy over recent weeks to warrant the rate rise, yet he expects volatility through the remainder of the year as investors debate the economy's health.

"Realistically, I think that the rates will drift under 5% again. It may take a month, may take two months," he said.

It's also important, however, to realize that extremely low rates likely won't be around forever, said Bob Walters, chief economist of Quicken Loans, in a statement.

"Luckily, we have seen rates drop some this week, which should help many consumers breathe a little easier," Walters said. "But the fact remains, the government's plan of purchasing mortgage-backed securities cannot go on indefinitely, and when it ends, we will most certainly see a spike in rates. The hope is that the Fed can keep rates low long enough to kick-start a housing recovery. Whether that will work remains to be seen."

"Volatility is the key word in the mortgage industry these days when it comes to rates," said Kyle Kerwin, senior vice president of mortgage lending for Signature Bank of Arkansas.

Here are five tips for those shopping for a mortgage today, particularly those who need to refinance an existing loan:

1. Get started on paperwork. Once you've found the mortgage professional you'd like to work with, get started on the necessary paperwork. Rates move regularly, and if paperwork has been started your file can be processed more quickly when rates hit a low. When you start the application process, your credit score will be pulled and you'll need to submit support documentation including W-2 forms and pay stubs. You might be asked for updated documents nearer to closing.

2. Make sure your credit is in good shape. Check credit reports and fix problems as soon as possible. Even seemingly small charges can haunt a borrower: A forgotten, unpaid parking ticket, for example, can noticeably affect a credit score, she said.

3. Decide at what rate it makes sense to pull the trigger. If you have a 6% rate now, rates would have to hit 5% or lower for it to make financial sense to refinance. Talk with your mortgage professional about what's best for your particular situation.

4. Stick to your guns. Once you determine the rate you'd need to get, it's probably wise to stick to that decision. Consumers sometimes gamble that rates will go lower, and the plan can backfire if rates reverse course. A couple of weeks ago, rates were close to 4.5% in his market, "and people wanted to hold out for an extra eighth of a percent."

5. Remember, rates are still good. Yes, rates could fall and create another record low as a result of a swoon in the stock market, a collapse of a major bank or a deepening of a recession. But it isn't likely that many consumers would crave those economic shocks. "Why would anyone wish for those things again to simply get a rock-bottom, ultra low mortgage rate? If it means saving $250 per month on your mortgage but it costs you $50,000 in your 401(k), how could this be seen as any kind of benefit?" he said.

European Rates Unchanged

2009-08-06T20:43:00.000-07:00

The Bank of England surprised markets on Thursday with a significant expansion of its program to boost the money supply and support growth, even as it and the European Central Bank kept official interest rates steady at record lows.

The move by the British central bank to boost its so-called quantitative easing program by 50 billion pounds ($84 billion) to 175 billion pounds ($295 billion) garnered the main attention in Europe, underscoring official caution about recent signs of an economic recovery.

As the ECB shied away from announcing any new measures on "enhanced credit support," the ECB's version of quantitative easing, the British pound lost almost two cents against the U.S. dollar while European government bonds rose — reversing an earlier loss — after the announcement in Britain.

The Bank of England noted recent conflicting data on the economy, saying financial conditions were "fragile" and that growth in the money supply "remains weak" as it explained its decision.

RBS economist Stephen Boyle said the bank's nine-member monetary policy committee had "decided it is better to be safe than sorry."

The British central bank turned to the quantitative easing program in March after almost running out of room to cut interest rates. Under the program, the central bank buys financial assets such as bonds from banks and pays for them by crediting the banks' account at the Bank of England, in effect creating new money.

As expected, it held rates steady at 0.5 percent on Thursday while the ECB stood pat at 1 percent. Economists expect both banks to keep interest rates at their current lows for some months.

In Prague, the Czech Republic central bank had more leeway, cutting its base rate by a quarter percentage point to a new record low of 1.25 percent.

Recent economic data in both the euro zone — a bloc of some 320 million people comprising nearly 17 percent of the world's output — and Britain have suggested early signs of an economic turnaround.

In Britain, the housing market and the key services and manufacturing industries have all shown signs of improvement in recent months. Similarly, German industrial orders recorded another strong month in June, advancing 4.5 percent and led by demand from other European countries, according to figures out Thursday.

"What I observed, in general, is that the overall mood is, right or wrong, today a little bit better than it was before, and not surprisingly because there have been a number of surveys that were a little bit better, some hard figures that were better," ECB president Jean-Claude Trichet told reporters in Frankfurt.

Trichet added that the "pace of contraction is clearly slowing down," and that the bank expects a phase of stabilization next year followed by a gradual recovery.

But concerns remain. Trichet repeatedly added that the outlook remains very uncertain.

"As far as we are concerned, and we can see, we are very prudent and cautious," he said.

The Bank of England said the recession had proved deeper than previously thought, reflecting data out last month showing that the British economy contracted by twice as much as economists had forecast in the second quarter — gross domestic product shrank by 0.8 pecent between April and June.

European Union statistics last week showed unemployment in the euro zone countries rose to a level not seen in a decade and consumer prices slipped more than expected.

"On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling," the rate-setting committee said in a statement accompanying its decision.

"On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending."

Britain's banks are still suffering from their losses in the financial crisis and government officials say they are too tight with credit for businesses despite getting government bailouts.

Trichet suggested that banks needed to do more to strengthen their capital bases "and where necessary, take full advantage of government measures to support the financial sector, particularly as regards recapitalization."

The conflicting data had left economists divided ahead of Thursday's announcement about whether the Bank of England would expand its quantitative easing program.

Halting the asset buying program too early could prolong Britain's worst recession in decades, but pumping too much money into the economy raises the risk of an inflation headache down the road.

Trichet said the ECB's decision in May to buy euro60 billion ($86.4 billion) in covered bonds has been warmly received, with the bank revealing that it has so far spent euro5.1 billion through the ongoing program.

The ECB said that buying the bonds from commercial banks, considered a relatively safe way to provide lenders with more cash, had somewhat revived the covered bond markets from a near standstill in September 2008.

Record For Resale Housing

2009-07-30T21:15:00.000-07:00

As Canada drives through one of the worst recessions in more than 70 years, the Hamilton- Burlington area reported June as being the highest selling month in local real estate history.

“June marked the sixth straight month of increased sales and had the highest number of residential sales on record, surpassing the record number sold in May 2007 during that year’s scorching market,” said Bruce King, president of the Realtors Association of Hamilton-Burlington (RAHB).

According to RAHB figures, the sale of residential properties in June totalled 1,560 with 1,267 freehold properties and 293 condominiums sold. There were 213 properties sold on the Hamilton Mountain, 64 in Ancaster, 46 in Dundas, and 122 in Stoney Creek. The remainder were sold in Hamilton and Burlington.

The average price of a residential property sold in June went up 1.9 per cent over June of last year to $315,055.

Marvin Ryder, lecturer of Strategic Market Leadership at the DeGroote School of Business, said one of the main factors contributing to the increase in sales in the resale house market is low interest rates.

“Even 40, 50 years ago we weren’t seeing numbers like this,” he said. “I would be reluctant to say they (the interest rates) are the lowest ever in recorded history, but they are the lowest in recent history, and that’s got to be good news for the market.”

The current prime rate in Canada is 0.25 per cent. This rate fluctuates when the Bank of Canada decides to raise or lower lending rates. The prime rate affects the average consumer because the rates on mortgages, credit cards and cars, follow the rise and fall of this rate.

The Bank of Canada has guaranteed the low rate through to June of 2010.

“We suspect the Bank of Canada rates will creep up within the later part of 2010, and possibly by Christmas of 2010 it may be around 1.5 to 2.0 per cent,” said Mr. Ryder. “Which means a mortgage will be around 4.5 to 5.0 per cent, and that still is very, very low. That’s what people were paying 40 years ago.”

He also said another factor for the thriving resale market is consumer confidence, which comes from the fact that seven of Hamilton’s top 10 employers are in the public sector, and have been relatively unaffected by the recession.

Mr. Ryder said these employees feel more confident about their future and carrying a mortgage.

One of the areas not benefiting from this booming market is new home sales. According to reported figures from Canada Mortgage and Housing Corporation, new home starts in Hamilton in 2009 dropped 60 per cent, from 1,165 units built in June 2008 to 405 in June of 2009.

Douglas Duke, the executive officer of Hamilton-Halton Home Builders’ Association, said one of the things driving the resale market are specific price point products such as homes selling from $200,000 to $275,000.

“You don’t find new homes in that price range now,” he said. A single detached new home in Hamilton would cost around $375,000, Duke added.

“I think we’ve seen the worst of it, but I don’t think the worst is over. It’s going to continue to be slow for the rest of this year and it won’t be until the end of next year that it will come back up in a positive way,” Mr. Duke said.

Despite the decline in new home sales, the resale market is expected to remain stable, said Mr. King.

“With prices remaining reasonable, consumers have found their way back to the housing market,” he said. “June’s numbers show us once again, that the greater Hamilton-Burlington area remains a great place to live and a great place to buy and sell real estate.”

Interest Rate Announcement

2009-07-21T08:21:00.000-07:00

With the central bank due to issue the scheduled interest rate announcement today and the quarterly Monetary Policy report Thursday, economists and investors are waiting to hear what Bank of Canada governor Mark Carney has to say about what looks like an economy on a razor's edge between recession and recovery.

Today's headline decision on interest rates is a no brainer.

As the central bank announced in April, the policy rate is to stay at the practical 0.25 per cent floor until at least next spring barring any nasty surprises. That means borrowing costs tied to the central bank rate and the banks' prime rate - many types of mortgages, lines of credit, as well as consumer and car loans - will remain stable for at least another year.

But the question is what will Carney say about the economy, for the rest of this year and going forward?

And will Carney begin hinting about exit strategies from some of the extraordinary measures the bank and the federal government have introduced to keep the money markets functioning during the crisis?

When he last pronounced on the economy in April, Carney got one thing wrong and, according to C.D. Howe Institute chief executive Bill Robson, one thing spectacularly right.

Carney's call for the economy to shrink by three per cent this year will almost certainly be revised because it was based on the first quarter coming in at negative 7.3 per cent, instead of the 5.4 per cent Statistics Canada later reported.

The consensus is now for the shrinkage to be held at 2.3 per cent, a significant difference in a $1.5 trillion economy.

What will be intriguing is what Carney says about output during the current third quarter, said economist Douglas Porter of BMO Capital Markets.

The last bank estimate was for a one per cent contraction, "but it's a pretty close call if it will show positive growth," Porter said.

"There are even some people who are looking for strong growth in the third quarter," he added, which would mean the recession is effectively over.

In April, Carney also unveiled the bank's options for intervening in financial markets through so-called quantitative and credit easing - the short-term purchase of government and corporate bonds to pump cash into the economy and ease the credit crunch for consumers and businesses.

"It was a masterful explanation of what might happen because it explained it clearly, but also because it dampened expectations of the bank actually doing it," said Robson.

"At the time there was some disappointment the bank wasn't signalling a more aggressive stance, but I think it was appropriately measured. Canada's response to this crisis has consistently been energetic as it was appropriate, but far more measured than what we've seen in other places."

Carney, of course, wasn't faced with the total meltdown of financial markets as his counterpart Ben Bernanke had to deal with in the United States.

But economists point out that the Bank of Canada governor did manage to introduce quantitative-easing light with the decision to maintain $3 billion in settlement balances to assure markets that there will be an available store of money to keep cash circulating in the economy.

And he helped restore stability in Canada with a precedent-setting commitment, albeit conditional, to keep rates at a specified level for one year. Financial conditions have improved since April, but this is no time to be talking about exit strategies from low rates, argues CIBC chief economist Avery Shenfeld, because any hint interest rates could rise would add uplift to the already high-flying loonie.

In fact, Shenfeld said Carney may want to again warn as he did in early June about an overly inflated loonie representing a danger to the economy, a tactic that may have dampened speculation in the currency last month.

"A shot across the bow of these speculators, with perhaps a clear hint that the bank could intervene against them if need be, could help cool their ardour for the Canadian dollar," Shenfeld said. He noted that both Australia and Switzerland intervened recently to halt upward pressure in their currencies.

If exit strategies are hinted at, Robson believes it will not be the low interest rate "guarantee," but more subtle measures, such as the central bank's purchase and resale agreements by which it injects extra cash into money markets.

Recent offerings of the bank's term PRAs, as they are called, and of Ottawa's mortgage asset swaps show a diminishing appetite for the financial vehicles, an indication credit conditions are becoming closer to normal.

"Exit strategies aren't the high profile measures here they are in the U.S., where the Fed has extended itself further, but there's a lot of importance to conveying to people that we are getting back to normal," Robson explained.

The bank governor has taken some grief in the past over what many believed was an overly optimistic view about the Canadian economy's ability to recover.

Now with conditions materially improving, Robson believes he has some reason to crow - in cryptic bank speak, of course.

"I think when we look back on Mark Carney's optimistic forecast, it's going to look more sensible than people thought at the time," he said.

Housing starts show small gain

2009-07-14T05:51:00.000-07:00

The pace of single-detached homes started in the Edmonton region picked up by 10 per cent in June over last year, said the Canada Mortgage and Housing Corp. Thursday.

Foundations were poured for 268 single-detached starts, up from 244 started in the same month last year.

That was a promising highlight in the agency's latest figures, which show total housing starts dropping by 19 per cent year-over-year--the sixth consecutive month of double-digit yearly decreases in home construction. Total housing starts in the Edmonton census metropolitan area fell to 450 units in June, from 556 a year earlier.

Another dismal month for multifamily starts drove down the total figures in June. Starts in this market totalled 182, down 42 per cent from the 312 started in June 2008. However, within the sector, semidetached and row starts increased year-over-year by 24 and 31 per cent respectively. The gains were countered by zero apartment starts reported in June, said CMHC.

As was the case in April and May, all June multiple starts were for the homeowner and condo market, with no rental starts.

"Developer concerns over rising rental apartment vacancies and a growing inventory of unabsorbed new condominiums will hold down multiple unit starts for the balance of 2009," said Richard Goatcher, CMHC's senior market analyst in Edmonton.

Across Alberta, housing starts in the seven largest centres rose to 1,446 in June, up one per cent from 1,434 a year earlier.

"Alberta's stronger housing-starts report is consistent with the modest improvements the province is seeing throughout its residential housing market," said ATB Financial senior economist Todd Hirsch.

"Prices have been gaining, inventories of existing homes have ebbed and home sales are rising. That all points to more confidence among homebuyers--and home builders are responding."

But Hirsch predicted housing starts are unlikely to match the feverish pace set in late 2007 any time soon, and it will be a bumpy ride to full recovery.

"Recent housing market strength has been boosted by record low mortgage rates. Higher rates and more economic turbulence in the future may keep Alberta's housing starts relatively subdued."

Unemployment To Rise

2009-07-07T07:07:00.000-07:00

Canada's finance minister said Friday that the country's economic recovery will likely be modest and job losses will mount into 2010 even after growth has begun.

Jim Flaherty gave his most recent, sobering assessment of economic prospects in a conference call from Chile, after a meeting with finance ministers from the Americas.

Responding to surprisingly high job losses reported in the United States earlier this week, Flaherty said all of his colleagues are concerned with the toll the recession is taking on workers. He warned that while the economy may be stabilizing, labor markets are not.

"We'll start to see stabilization, which we are seeing now, and then a return to economic growth but continuing deterioration in employment," he said.

On Thursday, the U.S. Labor Department reported that payrolls fell by 467,000 in June — about 100,000 more than expected — raising concerns that the recession could persist longer than anticipated.

In Canada, economists expect about 30,000 job losses for June. Since October, Canada has lost 363,000 jobs.

In the past, the finance minister has cautioned that difficult times remain for Canadians, but he has also expressed confidence that Canada would lead most industrialized countries in the swiftness and strength of the recovery.

In Friday's assessment, he appeared more circumspect, saying there was agreement among finance ministers that the rebound would be tepid.

"The anticipation is that the recovery will be modest, so that we'll experience some continuing increase in unemployment, but as we move into 2010, we'll start to see modest recovery," he said.

Canada's unemployment rate rose to 8.4 percent in May, the highest level in 11 years.

Most of the job losses have occurred in manufacturing in central Canada. More than 70 percent of Canada's exports go to the United States.

The country has avoided bank bailouts and has not experienced the failure of any major financial institution. There has been no crippling mortgage meltdown or banking crisis north of the border where the financial sector is dominated by five large banks.

But the global sell-off of commodities hurt Canada last fall. The recent run-up of commodity prices is helping western Canada, a resource-rich economy dependent on oil and other commodity prices.

The Canadian government has committed 22.7 billion Canadian dollars ($19.5 billion) in stimulus funds earmarked for this year.

Prime Minister Stephen Harper has said Canada's deficit of CA$50.2 billion ($43.2 billion) is significant, but more manageable than other countries.

Canada's central bank has warned that the 20 percent surge in the value of the Canadian dollar since March threatens the country's economic recovery.

Canadian banks' edge won't last long

2009-06-28T18:54:00.000-07:00

Canada’s vaunted conservative banking culture offers its financial institutions a competitive advantage during economic downturns, but the edge they now enjoy over their global counterparts will likely disappear in about a year, says a top U.S. banker.

Robert P. Kelly, chairman and chief executive of Bank of New York Mellon, told a Toronto audience Wednesday that Canadians “should be proud” of their financial system because the “hard-core reality is that it’s a system that works.”

However, the 56-year-old head of the fifth-largest bank in the United States with total assets of US$220-billion, cautioned that while Canadian banks have “a huge competitive advantage right now, you have a window that’ll probably last 12 to 18 months.”

Mr. Kelly’s comments were made during a two-hour panel discussion moderated by John Manley, former deputy prime minister, on how Canada and the United States are managing their financial systems in response to the current credit crisis.

Rick Waugh, CEO of the Bank of Nova Scotia, was the other panelist on the panel, sponsored by the Canada Institute of the Woodrow Wilson International Center.

Mr. Waugh told the blue-chip Bay Street audience that the “Canada brand has never been better,” and acknowledged that it was a good time for the banks to take advantage of the country’s favourable international reputation.

“The American model is broken and the whole world knows that,” he said. “The doors are as wide open as I’ve ever seen. This crisis has created an opportunity and we have a leg up on the Americans.”

Mr. Kelly cited three main reasons for the success of Canada’s banks during the recent financial meltdown. He pointed to the “mess” in the US$18-trillion mortgage market south of the border, securitization markets that went “out of control,” and a “mature, well-run and well-managed financial system” in Canada that does not exist in the United States.

For example, Mr. Kelly, a former vice-chairman at Toronto-Dominion Bank, said the United States does not have a national banking system, and while the regulatory reform package proposed by President Barack Obama last week is “largely a good thing,” it still doesn’t go far enough to consolidate the number of regulators and players in the industry.

For his part, Mr. Waugh credited Canada’s system of “checks and balances” and “good governance” in the public and private sectors.

The head of Scotiabank, the third-largest in Canada by market capital, cited the macroeconomic policies of the Bank of Canada and regulatory oversight of the Office of the Superintendent of Financial Institutions, as well as “good management” practices inside the executive offices of the banks, especially prudent risk and capital management practises, as reasons for the stable financial sector.

“The back-up systems are working even though they may be far from perfect, they are working,” he told the crowd of about 125 people. “There was not one regulation that said, ‘Don’t invest in subprime and don’t invest in toxic assets,’ and yet no financial institution here got in over their heads.”

Still, Mr. Waugh predicted that shareholders will have to recalibrate their expectations because there is still a lot of deleveraging to occur.

“We are resetting a new norm. That means a lower level of absolute profitability, lower level of savings and growth rates,” he warned.

While Mr. Kelly is the latest to heap praise on Canada’s financial system – he joins President Obama and the Geneva-based World Economic Forum – he seemed to caution against smugness.

“Canadians are more conservative by nature and that’s a competitive advantage in a downturn but it’s not a competitive advantage when things are good,” he said.

“Over time, don’t bet against the U.S.,” Mr. Kelly warned, saying there is no greater growth system than U.S. capitalism because it encourages innovation, risk-taking and the rise of the best people to the top of organizations.

“A lot of bad things have happened with the U.S. capitalist system,” Mr. Kelly said. “It’s good to learn from its mistakes, but what’s really hard is to implement the good aspects. Canada is very well-positioned.”

Buy a house in the States

2009-06-18T19:53:00.000-07:00

Looking for a U.S. property within walking distance to the beach? How about a five-bedroom home in Cragin, a North Chicago neighborhood 25 minutes from downtown? Just two years ago, these sales pitches might have been accompanied by warnings like: "Hurry, at $500,000, these prices won't last!"

Not today. With transactions scarce, desperate sellers are dropping prices. A three-bedroom, two-bath bungalow in Huntington Beach, Calif., is on the market for US$100,000. That's down US$142,000 from August 2008. Being 2 1/2 kilometres from the beach helps to make up for the vinyl sided-exterior.

And a three-bedroom, two-bathroom home in Fort Washington, Md., a leafy D.C. suburb just outside the Beltway, sold for US$350,000 in January of 2007, a huge flip from its $120,000 sales price in 2002. That it's currently listed for US$74,900 should be a sign of a serious seller.

Such prices allow select buyers to use their credit cards to purchase them. Today, even with credit tight, American Express (nyse: AXP), Visa (nyse: V) and MasterCard (nyse: MA) offer cards with a US$100,000 limit, and often more, to those with an outstanding credit score. For most cities and regions, $100,000 is a shockingly low figure representing a major drop from the height of the market. Of homes currently listed, a total of US$27.4 billion has been slashed from their original asking prices.

Most sellers won't take plastic, but they will accept cash. For someone who isn't liquid enough to have US$100,000 cash, but doesn't want to miss out on a steal of a deal, taking out a cash advance can be a useful alternative. Given interest rates on credit cards, however, this should only be considered if you'll be able to pay off the debt within a few months.

With that in mind, we looked across the United States for 10 homes that could be had for under US$100,000, but weren't properties in dilapidated, far-flung neighborhoods.

Homes in the Western U.S.—states past Colorado—are selling at a US$276,000 median price, down from $350,000 in 2006, and fell 20 per cent in the past year, according to the National Association of Realtors (NAR). There, you'll find a handful of the properties on our list. There's a US$74,990 three-bedroom, two-bathroom home in the Phoenix suburb of Avondale, which sold in 2006 for US$250,000. In the Seattle suburb of Mill Creek, Wash., a three-bedroom, 1,858 square-foot home is listed for US$87,296. It was sold for US$386,239 in 2006.

It's a similar story elsewhere. While the US$15,000, three-bedroom, ranch home in Detroit could use a lot of work—as well as a new neighborhood—plenty of the homes we found, such as a US$53,000 Dallas home, near Laurel Land Memorial Park, that has front and rear yards, a garage, a patio and three bedrooms are move-in ready.

Often, homes at these prices are either in foreclosure or are distressed. That means that while the asking price is likely negotiable, many are being sold "as-is," in which the seller doesn't have to fix any flaws before the sale.

This is an important caveat. That's because, even though Federal Housing Administration mortgages, a product designed for first-time home buyers at the entry level, comprise 25 per cent of the market, according to the Department of Housing and Urban Development, some sellers are nervous that their properties won't make it through the qualification process, either due to defects or code problems.

"We're seeing lots of sellers taking lower bids instead of accepting buyers with FHA mortgages," says Glenn Kelman, chief executive of Redfin, a national real estate brokerage. "The sellers are worried they won't meet the FHA requirements and are willing to take less."

Another important note: While sellers are taking huge discounts to move inventory—home sales in April rose 3 per cent according to the NAR—this isn't necessarily a sign of a recovery. A full 45 per cent of those sales were foreclosures and short-sales, where sellers and investors are desperately unloading unwanted inventory. Translation: Further price drops could be on the horizon.

"Other than first-time home buyers and investors that can pay cash, much of the housing market is still dead and that spells trouble for housing prices," says Anthony Sanders, a professor of real estate finance at George Mason University. "The recent call for a turnaround is like watching Macy's have a clearance sale—80 per cent off of sticker—for overstocked inventory. Sure, their sales increase. But clearing overstocked inventory is not a sign of recovery for new clothing lines."

Mortgage penalties

2009-06-07T17:37:00.001-07:00

Sarah Cervinka and her sister bought a condo in late 2007 and took out a five-year mortgage with President's Choice Financial.

At the time, they were told they would pay three months' interest – about $5,000, in their case – as a penalty to get out of the mortgage early.

Her sister lost her job and did not find another one. Unable to carry the mortgage on one salary, they sold the condo last month.

That's when they called the lender and learned the penalty to break the mortgage was now $20,000.

She felt misled because she had not been warned about the prospect of a much higher penalty.

"Any gains we may have made are now being absorbed into an interest debt that we did not agree to pay nor anticipate," she said.

Most lenders charge three months' interest or an interest rate differential (IRD), whichever is higher. With rates falling sharply, the IRD penalty will be higher.

"Early prepayment charges are outlined and disclosed in the documentation provided to clients when they take a new mortgage," said Rob McLeod, a spokesman for CIBC (a partner with Loblaw Companies in PC Financial).

"It is always advisable for mortgage holders to check with their financial institution about any penalties that may apply prior to taking a decision to sell their home.

"In this case, the client did not contact us prior to agreeing to sell the property."

The topic of mortgage penalties has attracted lots of reader mail.

Many borrowers talked of their frustration in trying to firm up the cost of prepayment when interest rates kept coming down.

That trend may have reversed itself this week. Most big banks have raised their five-year mortgage rates because of a spike in long-term bond yields.

Mary: "I have a five-year closed mortgage and was quoted a $2,000 penalty in April. A week later, rates had dropped and my penalty had doubled to $4,000.

Marc: "My wife and I had to put our house on the market. Our early payout penalty, already absurdly high at $14,000, has been raised to $24,000.

"Unless we get exactly what we're asking for, we'll end up owing the bank money when it's all done."

Randy: "My ex-wife and I have finally sold our home. Four months ago, the penalty was $4,000. Now it's $14,500. If rates go down again by our July closing, it could get up to $20,000."

Susan: "In 2007, I became ill and was confined to a wheelchair, unable to work. My husband, three kids and I had to live on one income for more than a year.

"We put our house up for sale, hoping it would pay our huge debt. We let our bank know and were never told we had to pay a penalty.

"Finally after a year, we have a buyer. We called the bank and found we have to pay $7,000. We never accounted for this penalty in our sale price."

Susan's story had a happier ending after she went to the media. TD Canada Trust agreed to cover her penalty – perhaps because she did call before selling and the bank missed the chance to mention it.

"We are thinking of other ways we can help her as well," said TD spokeswoman Kelly Hechler.

The lesson: Getting out early can cost you plenty, so check with the lender before doing anything. And if you face financial hardship, don't be afraid to say so. You may qualify for help.

Banks boost mortgage rates

2009-06-03T07:07:00.000-07:00

Canada's biggest banks are hiking key mortgage rates at a time when the bond market is worried about risk and the longer-term threat of inflation.

Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Bank of Nova Scotia and Canadian Imperial Bank of Commerce increased their posted rates on five-year, fixed-rate mortgages by 0.2 per cent to 5.45 per cent. The changes at RBC and BMO took effect yesterday, while new rates at TD, Scotiabank and CIBC will be available today.

RBC, BMO and Scotiabank, however, also have "special offers" on five-year closed mortgages at 4.15 per cent. Those promotional rates, subject to change without notice, also reflect a 0.2 per cent increase.

Mortgage broker says rates are rising from "abnormally low" levels. Consumers, still have plenty of opportunity to take advantage of lower borrowing costs because not all lenders have repriced loans.

"Even lenders that we were told were going to increase still haven't," . That means both first-time homebuyers and those with mortgages coming up for renewal can still snag deals.

But, U can still get the best rates "On a quick close (within 30 days) we can still get 3.69 (per cent). On a 120-day rate hold, we can still get 3.79 (per cent)."

Five-year, fixed-rate mortgages are traditionally the most popular option for homeowners. Borrowing costs on the bond market largely influence consumer rates.

Yields on longer-term bonds have soared in recent weeks, driving up the cost of borrowing for lenders. Experts say yields are rising because the bond market is focusing on risk and the future prospects for inflation.

Central banks usually try to control inflation by raising interest rates. The Bank of Canada's overnight rate is currently sitting at 0.25 per cent and it has signalled plans to hold it there well into 2010, depending on inflation.

The bond market, though, sees a risk that interest rates may change down the road, said TD economist Grant Bishop.

"Certainly there is the recognition that interest rates are going to have to go up both because of the need to rein some of this monetary stimulus in – once the economy gains traction – and the level of debt that is being issued by governments."

Yields are also climbing because the market is "a little less pessimistic" about the economic outlook, said David Power, a vice-president in RBC's corporate treasury department. If bond yields continue to rise, that will impact the industry's pricing of both mortgages and deposits, he said.

Statistics Canada, meanwhile, reported yesterday that household demand for credit dropped "significantly" in the first quarter. Household demand for funds in the January-to-March period totalled $65 billion, down from $91 billion in the fourth quarter of 2008. Canadians, it seems, opted to save rather than spend.

"Despite the decrease in the five-year mortgage rate, net new mortgage borrowing also contracted during the first three months of 2009, as investment in residential construction and activity in the resale housing market continued to decline," StatsCan said.

Bank of Canada data, meanwhile, suggest household credit rose 1.1 per cent in April over March, mostly with growth in mortgages and lines of credit. "Even through these uncertain economic times, falling house prices and favourable mortgage rates appear to have successfully attracted new homebuyers," TD's Bishop noted last week.

Inflation falls to lowest rate in 14 years

2009-05-25T08:18:00.000-07:00

Canada's annual rate of inflation fell more than expected to the lowest level in 14 years in April as the economic downturn continued to push consumer prices lower.

Statistics Canada said Wednesday its consumer price index declined to 0.4% during the month from 1.2% in March, while the core rate, which strips out volatile items such as food and energy, and is a key factor in setting the Bank of Canada's monetary policy, eased to 1.8% from 2%.

"While upward pressure on the consumer price index came primarily from food, the slowdown was due mainly to price declines for energy and reduced upward pressure from non-energy shelter components," the federal agency said.

"Excluding food, the CPI fell 1.1% in the 12 months to April. Excluding energy, the CPI rose 2.4% over the same period."

Most economists had forecast an annual inflation rate of 0.6% for April and a core rate of 1.8%, well below the Bank of Canada's target rate of 2%.

Statistics Canada said food prices rose 7.1% in April from a year earlier, down slightly from the annual rate of 7.9% rise in March.

The biggest food-price increases were for fresh vegetables, up 26%, fresh fruit, 16.8%, cereal products, 9.6%, and beef and chicken, both up 9%.

Shelter costs rose by an annual 0.2% in April from 2.1% the previous month.

"The slower pace of increase in shelter costs was due primarily to a drop in prices for natural gas and to slowdowns in mortgage interest costs and electricity prices."

Douglas Porter, deputy chief economists at BMO Capital Markets, said "inflation is now in full retreat ... even with the recent backup in gasoline prices."

"While underlying price trends are holding firmer, they also look to wane notably, especially now that the fever in grocery prices has finally broken," he said.

Last month, the Bank of Canada cut its trendsetting interest rate to a record low of 0.25% and said it would keep it at that level through the second quarter of next year in an effort to spur business and consumer spending in the face of a deepening recession.

The Canadian economy contracted by 3.4% in the fourth quarter of 2008 and the central bank estimates gross domestic product shrank another 7.3% in the first three months of this year.

2009 - Housing starts likely to fall

2009-05-19T08:06:00.000-07:00

Canadian housing starts are expected to continue to decline in 2009 as a result of the economic recession before rebounding in 2010, Canada Mortgage and Housing Corp said in a forecast on Tuesday.

The government agency sees housing starts declining this year to 141,900 units from 211,056 last year. It predicts housing starts will rise again next year but still remain below the 2008 level at 150,300 units.

"The decline in housing starts in 2009 can be attributed to several factors, including the current economic climate, increased competition from the existing home market, and the impact of strong house price growth between 2002 and 2007," said Bob Dugan, chief economist for CMHC.

Sales of existing homes are expected to decline to 357,800 units in 2009 from 433,990 in 2008, but increase to 386,100 units in 2010. The average price is expected to decrease to C$283,100 ($244,000) in 2009 and to stabilize in 2010.

Housing starts fell 19.9 percent in the month of April, resuming a downward trend that began in 2008 despite a surprise upturn in March.

Housing activity has softened in Canada, though the sector has not experienced the same sort of plunge that has been seen in the United States. A sharp economic contraction and heavy job losses will continue to pressure the housing market throughout this year, analysts have said.

CMHC said earlier this month that new home construction in Canada was now at a "more sustainable level" after having been exceptionally strong over the previous seven years, exceeding 200,000 units per year.

In the United States, housings starts and permits unexpectedly fell 12.8 percent to record lows in April, a government report showed on Tuesday, denting hopes that stability in the housing market was imminent.

Rates Fall Down

2009-05-11T05:57:00.000-07:00

When interest rates are low – particularly now with the Bank of Canada benchmark rate pegged at an historic low of .25 basis points – many think they should refinance their mortgage. This isn't surprising, since a home is the largest purchase most people ever make, with borrowed money in most cases.

This may or may not be a good strategy.

Whether you should refinance your mortgage in a period of low interest rates depends on how much it will cost you to break your existing mortgage compared to how much you will save in interest payments.

If you break an existing mortgage, you will have to pay the greater of three months' interest or the interest rate differential (IRD).

An IRD is a penalty for early prepayment of all or part of a mortgage outside of its normal prepayment terms. Usually, this is calculated as the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term.

For example, if you had a $100,000 mortgage at a 9 per cent interest rate with 24 months remaining and wanted to renegotiate your mortgage at 6.5 per cent for 24 months, your IRD would be $5,000 ($100,000 x 2.5% = $2,500 x 2 years = $5,000).

It may only make sense to refinance your mortgage if the interest rate savings over the remaining life of your mortgage exceeded the value of the IRD.

"The refinancing decision depends on the cost of breaking the mortgage versus how much you save," said Patricia Lovett-Reid, senior vice-president at TD Waterhouse. "You may find you should just stay where you are."

Another strategy is to take a variable rate mortgage. If interest rates go down and you keep your mortgage payments the same, you will be paying off more of your principal with each payment and will pay down your mortgage faster.

Debt is a destroyer of wealth in good times and bad and eliminating it is a good strategy.

Borrowing to invest when interest rates are low is another strategy. This is called leveraging.

Leveraging has a tax advantage because you can write off the interest on the money you borrow to invest.

If your investments perform well and earn a return high enough to make a profit, leveraging has great appeal.

But there is some risk if your investments go down. Just as your gains are magnified with leveraging, so are your losses.

"Investors should use leveraging prudently as part of an overall balanced financial plan," said Lovett-Reid.

Low interest rates can affect your investment portfolio as well.

Some stocks are more sensitive to interest rates than others.

Lower interest rates make companies with high debt loads – such as utilities – more attractive, as well as automobile manufacturers and real estate companies, whose products become cheaper for consumers to buy when rates are low.

Low rates also are affecting fixed income securities. As such, Lovett-Reid said investors after higher returns should consider investment grade corporate bonds, which are yielding around 4.50 per cent for a three-year maturity.

ING Canada could be spun off or sold

2009-05-04T19:33:00.000-07:00

ING Bank of Canada could be spun off or sold as its European parent seeks to raise cash after being bailed out by the Dutch government, according to people familiar with the matter.

The strategic options are being explored as the parent group seeks to recoup up to $13-billion by selling off up to 15 subsidiaries spread across the globe to refocus on core markets.

The review underlines how the fallout from the financial crisis continues to reshape the country's financial landscape, and could see "the guy with accent," who is ubiquitous on national television, lose his Dutch intonation.

ING Direct has grown into one of the country's leading mortgage lenders over the past dozen years and holds about $24-billion in deposits on behalf of Canadians, according to regulatory filings.

The parent has already spun off its other Canadian unit, selling the last of its property-and-casualty insurance business to Canadian shareholders two months ago in a $2.2-billion deal.

A similar float is seen as one option for the bank, alongside the possibility of a sale to a strategic buyer such as a Canadian insurer.

Manulife Financial Corp., the country's largest insurer, already operates a small banking operation, but such rivals as Sun Life Financial Inc. and Great-West Lifeco Inc. do not have the capacity to take deposits.

People close to the process stressed that there was no certainty the parent would ultimately divest its ownership of the Canadian unit, which is a net contributor to the Dutch group and a better fit than other foreign assets on the block.

Peter Aceto, chief executive of ING Bank of Canada, declined to speculate on the possibility of a divestment, but made it clear it was business as usual at the bank.

But he said ING Direct's "emphasis on retail savings and investments makes it a strong, strategic fit for ING Group."

"Our business in Canada is profitable, we are able to gather savings in an efficient manner, we underwrite excellent-quality mortgages and we execute our customer-focused, low-cost model tremendously well. Local management and ING Group are proud of our Canadian business," he said.

The bank has had unique success in Canada by operating without branches and reaching out to price-sensitive consumers through online and telephone banking services, and generates enough capital to sustain itself.

The company's marketing has focused on high-interest savings accounts and flexible mortgage products that have forced a shake-up at the country's dominant domestic banks.

The ability of the bank to retain loyal customers in the event of a divestment is seen as a key factor in its valuation and its appeal to a strategic buyer.

"How sticky are the deposits?" asked one person observing the process.

Regulatory filings suggest the deposits have held up well during the course of the financial crisis and grown at a higher rate than analysts predicted.

Mr. Aceto said, "Gathering savings directly from customers in a low-cost, tech-savvy manner and offering them simple lending and investment products to help them through their life's journey is fundamental to what ING Group wants to do and what ING Direct has always done."

Buy or Not to Buy

2009-04-27T08:49:00.000-07:00

If Shakespeare's Hamlet were a 20-something living in Toronto today, chances are he'd be working on his first career. He'd have some inheritance in the bank, he might even be living in his mother's basement.

He'd have little job security, no pension and would probably be soliloquizing about the same dilemma as everyone else his age:

To buy or not to buy, that is the question; Whether 'tis nobler on the pocketbook to suffer the outrageous rent, or to take up a sea of mortgage payments, and by doing so, retire with equity.

With interest rates at the lowest they've been in more than 50 years and with home and condo prices in decline for the first time since 1996, many potential first-time buyers are viewing this as their best chance to buy into an otherwise unaffordable market.

That's partly what led Ren Ramkhelawan to buy his first highrise condo near Bathurst St. and Lake Shore Blvd.

Ramkhelawan, a 27-year-old systems architect with a local charity, reckons he spent $18,000 in rent on his one-bedroom apartment at Spadina and Bloor Sts. After feeling he was "flushing rent down the toilet," Ramkhelawan started looking for a condo in October 2007 but was soon priced out of the market.

"I'd make an offer and then the seller would get more offers, and before long it was just beyond my price range," he remembers.

At one point in his search, he'd actually negotiated the purchase of a 500-square-foot condo for $222,000. But he backed out because he felt it was too small and he'd be better off in his larger apartment.

A year later, the economy had tanked, taking the condo market with it. He's now the proud new owner of a 700-square-foot, $227,000 condo.

Though he's paying $200 more per month on the combination of condo fees, mortgage payments and property taxes than he was at his old $980-a-month apartment, he feels he's getting a better deal.

"In the end, I wanted my own place. I wanted to know that I was investing in something instead of just handing my rent money away."

But Ramkhelawan, like many other first-time owners, doesn't see himself living in the condo for more than three years, when he plans to flip it and make a profit.

Problem is, many in the realty business argue Ramkhelawan and others are banking on returns from a world that no longer exists.

"Everyone wants to flip houses and condos like pancakes," says Greg Stanley, a mortgage broker.

"Maybe we should have a change of view, thinking that a house is actually a home like they did in the old days. Back then, if you bought a house and sold it, it would be the same price. No one expected the houses to go up in value; they only expected to pay them off."

The Organization for Economic Co-operation and Development recently released data that show house prices have fallen in Canada, but prefaced it with the view that such prices "will have to fall still more ... if affordability, measured by the ratio of house prices to income, is to return to its long-term average."

If that's the case, then first-time buyers who choose to jump into the market now could see themselves carrying a hefty mortgage on a depreciating house. Anyone who bought a home when the market peaked in 1989 watched their "investment" plunge when the housing market tanked months later. Those homeowners still haven't recovered the pre-bust value of their homes two decades later, if you factor in inflation.

"There's so many myths around real estate," says James McKellar, a professor of real property development at York University.

"Let's not forget that before the 1980s, the motto was that a home was a money pit. Over a long period of time, housing does not keep pace with inflation. Don't look at it as an investment. A house is a cost. You don't buy a car as a good investment – you buy because you need it."

"The conditions (for buying) are favourable in terms of interest rates and affordability, but that's just one concern.

"The decision to buy depends on your personal circumstances – that includes your personal needs and how secure you are in your job situation. Ask yourself: is your ability (to pay down a mortgage) going to be the same in a few years time?"

The results may surprise you as, in some cases, those who rent and invest the money they would have otherwise thrown into their mortgage come out on top in the long-term.

That said, a home is an asset and having to pay off a mortgage forces you to throw your savings into something instead of wasting your money.

Fooled By The Optimists

2009-04-15T21:11:00.000-07:00

Against all odds, the U.S. consumer has staged a comeback in the first quarter of 2009, leading some analysts to predict a bottom in GDP and to call a floor for the stock market.

This analysis is based on the shaky premise that consumer spending will remain firm in the face of contracting consumer credit. The stock market has already rebounded, and investors should not get sucked in after the fact.

The optimists are pinning hopes on a recovery in consumer spending in the first quarter of this year, green shoots of growth through cracks in the asphalt of the U.S. economic recession.

"The record shows that recessions are vanquished not by the return of employment growth, but rather by an increase in expenditures owing to unsustainably deep spending cutbacks by both households and businesses," says John Lonski, chief economist, Moody's Investor Services.

But is this sufficient to pull the economy up by its bootstraps?

It is not that consumption has bounced back in a strong way; rather, production has fallen off a cliff, so inventories are now very, very low relative to spending. Businesses have over-estimated the weakness in final demand, according to Tim Bond of Barclays Capital, and the gap has not been this extreme since the bottom of the 1974 economic recession -- which coincided with a substantial rebound in the U. S. stock market.

Pulling a fine-toothed comb through the data may lead to faulty conclusions, however. In this case, a rebound in consumer demand in the first quarter of 2009 may be a hard act to follow.

The US$8.1-billion rise in consumer credit in January coincided with a snap back in retail sales. In February, revolving credit (credit card loans), was down by US$7.8-billion, according to Lombard Street Research.

The problem is that credit is being "ripped out of the wallets" of Americans, according to top-rated U. S. bank analyst Meredith Whitney. Approximately half of the US$5-trillion in credit-card lines will be cut by the end of 2010, says Whitney. If she is right, it will cause a cascading effect on consumer spending because 90% of Americans use revolving credit lines more than once per year and 45% revolve credit lines every month.

The government is throwing households a lifeline by allowing them to refinance their homes at very low rates over the coming months.

"It's the lowering of interest rates by the Fed that is leading to the recent surge in mortgage refinancing and more breathing room in household balance sheets," says Chris Snyder, economist with Moody's Investor Services.

The stock market has already discounted a lot of good news. The S&P 500 index staged a solid 25% rebound since its March low in line with the historical precedent between 1974 and 1976, cited by Barclays. Gains beyond this point won't come as easy.

The S&P 500 appreciated 34% between December, 1974, and February, 1976, but thereafter acted like a tired sprinter in a distance race. After that quick sprint up, the market eked out a narrow gain of 8% to the end of the decade. In inflation-adjusted terms, the market passed out on the track.

In fact, even including the market bottom in 1974, the S&P 500 total return index appreciated a grand total of 8.7% after adjusting for inflation. Over the second half of the 1970s, the market was basically flat after adjusting for inflation. So any comparison to that period does not present a compelling case for buying the market today, rebound or not.

The market will have to digest the results of the U. S. Treasury stress test on bank capital in the coming months. The matter of bank insolvency is the next big test for the market, and any indication that a major bank requires further capital to regain solvency is likely to overwhelm the current market focus on economic recovery.

Housing prices stronger in Q1

2009-04-11T21:38:00.000-07:00

Local housing prices were higher across all three residential real estate categories in the first quarter of the year, amid declining prices elsewhere in the country due to an expected market correction, according to a quarterly report by Royal LePage Real Estate Services Ltd.

The report showed that the average price for detached bungalows in Ottawa rose 1.9 per cent from the same quarter a year earlier, to $317,500, while standard two-storeys sold for an average of $318,500 in the first quarter, up 2.8 per cent year-over-year.

The largest price gain was in the standard condominium category, which sold for an average of $207,833, up 4.9 per cent.

The report noted that in Ottawa and elsewhere, the housing market had been surprisingly "resilient" in the quarter, especially considering the expectation that the lower consumer confidence during the downturn would drive prices downward.

"Increased buyer activity at the end of March suggests that spring will bring its typical increase in unit sales activity as buyers target summer moves," the report said.

Atlantic Canada had the strongest performance in the country across all three housing types surveyed, with Royal LePage Real Estate Services CEO Phil Soper pointing to Newfoundland as "Canada's sole remaining seller's market" due to recent investments in the province's bustling commodities sector.

Still, overall prices were somewhat lower due to pressure from markets in the Greater Toronto Area, British Columbia and Alberta. The average price of a two-storey home in Canada declined 6.5 per cent to $379,636, while a standard condominium sold for $232,877, 3.4 per cent lower than in the first quarter of 2008.

"Canadians in most regions should not expect the prices of their homes to begin appreciating again until the overall economy begins to stabilize, likely in the first half of 2010," said Mr. Soper in a statement.

However, the report indicated that stabilization could soon be on its way in the hard-hit western markets, since B.C. and Alberta saw housing market corrections "well ahead of the full impact of the current economic crisis."

Fixed versus Variable

2009-04-05T12:18:00.000-07:00

Traditionally, the most important consideration in choosing a fixed or variable mortgage has been which strategy would save the most money.

But that might no longer be the case: Choosing a type of mortgage and term today may come down to what makes sense for the individual homeowner rather than what saves cents.

"If you were buying a house 10 years ago, fixed versus variable was the biggest decision you made," says Moshe Milevsky, finance professor at Toronto's York University and executive director of the Individual Finance and Insurance Decisions Centre. "But now there are more important things in place. Equity prices are falling, housing prices are falling. I think there are three or four things more important than fixed versus variable now."

Mr. Milevsky's 2001 study of five-year rolling interest rates from 1950 to 1999 showed that 88.6% of the time, homeowners would have been better off with floating or short-term mortgages rather than five-year, fixed-rate mortgages, saving an average of $22,000 on a $100,000 mortgage amortized over 15 years.

"The last time I looked at it, a year ago, the same strategy was holding up. Roughly ... 85% of the time, you were better off going with variable rates, rather than fixed rates."

Another, lesser consideration was peace of mind: New homebuyers might sleep better when essentially paying an insurance premium as part of locking-in payments for five years.

But saving a few dollars should no longer be the determining factor in the fixed-variable dilemma.

"Too much emphasis has been based on this study," Mr. Milevsky says. "It's the most-downloaded item on our Web site. But if you look at interest rates right now, you're debating over a per cent. When fixed rates were 9% and variable rates were 5%, that's a big difference. That's another issue."

The flattening of the bond yield curve in recent years meant you might pay only 1% or 1.5% more to lock in a long-term rate, and that made the stability of fixed rates much more attractive than it was five years earlier.

Many homeowners with variable rates below prime are now offered renewal rates above prime. Discounts can sometimes be negotiated on longer terms, and other times on variable rates.

"Renewing is not just a day at the bank, it's a major event in the life of your house," says Mr. Milevsky, adding that low mortgage rate s make other considerations more important in the fixed-variable debate. "If you're going to renew in a year or two, what if your housing price is lower than the value of the loan, and the banks won't give you that again? What about locking in as long as possible? If I

get the five-year rate, they're not going to bother me.

"No. 2 is how much money is put down. If you put down only 5%, how much of an effect will that have on your credit rating? Banks are more cautious. Getting a deal might depend on whether you go fixed or variable.

"[Then] there's the question of employment. If you do not have a mortgage with flexibility, what if you can't make a payment for months?"

One compromise may be a combination mortgage that is part-fixed and part-variable.

"I'm getting to be a bigger fan than I used to be," Mr. Milevsky says. "I used to say 'diversify your assets, not your liabilities,' but if you can make the deal to lock in some of your mortgage, that might be a good thing. But that's two mortgages, with two sets of prices, and if it's an extra $200 that's one thing, but an extra $1,000 is another."

Consumer bankruptcies expected

2009-03-27T06:16:00.000-07:00

Consumer bankruptcies in Canada spiked sharply in January, the beginning of what credit experts warn could be a wave of bankruptcies this year that are the inevitable result of rapidly rising unemployment.

"We're not even close to the filings we saw in 2004," said Bruce Alger, president of Alger & Associates, a bankruptcy trustee with several offices in Alberta. "We've got a ways to go yet."

More than 10,700 people in Canada declared themselves insolvent in January, an increase of 23.1% from the same month in 2008.

For the 12-month period ending on Jan. 31, 2009, 117,704 consumers had declared themselves insolvent, a 16% year-over-year jump.

Within minutes of publishing the latest bankruptcy statistics Tuesday morning, the federal government said the number of Canadians receiving employment insurance jumped to 560,400 recipients in January, up 22.8% from February, 2008.

Diane Finley, the Minister of Human Resources, said the federal government would spend an additional $60-million to process new claims more rapidly.

Although the Canadian economy created more than 163,000 new jobs between January and October last year, it has rapidly shed them since then. Between November and the end of February, more than 295,000 Canadians became unemployed.

By last summer, the steady work Daniel Asboth, 25, had as a drywaller in Toronto was all but gone.

But he still had to make payments on his "baby," an Acura automobile, and the rent, and credit-card bills that were piling up. "I was making $1,000 a week," Mr. Asboth said. "When you are used to getting that money, you don't think about saving, because you know you are going to be getting that money at the end of the week. Then, all of a sudden, it stopped."

Mr. Asboth admits he was "bad" with managing money, but said he felt blindsided when his work ran out and debt went up.

Finally, in October, owing more than $25,000, he decided that declaring bankruptcy was one of his few options.

Ian Lee, a former mortgage officer at one of Canada's banks and now a business professor at Ottawa's Carleton University, told a parliamentary committee Tuesday that, while the recession is the chief cause of what will be a rapidly rising bankruptcy rate this year, too-easy access to credit, and consumers who have become addicted to borrowing, are aggravating factors.

"There hasn't been a lack of access to consumer credit. Consumers are wildly over-leveraged. The problem isn't being able to get credit at the consumer side, it's they have too much credit in terms of what they carry," Mr. Lee told MPs.

"These numbers represent people who almost certainly will be unable to be part of the economic recovery," said Michel Arnold, executive director of Option consommateurs, a Montreal-based non-profit consumer advocacy group.

Mr. Lee noted household debt, as a percentage of household disposable income, had doubled in the last 25 years, from 15.7% in 1981 to 36.2%. At the same time, the savings rate plummeted to 0.5% in 2005, the lowest level recorded by Statistics Canada since the 1920s. In other words, for every $100 Canadians receive in income, they are saving, on average, 50 cents.

"One of the points that this recession is bringing out is the fact that people have been carrying a lot of debt, and this is an eye-opener, because when that job is lost or those hours are cut, it really sets off a panic," said Linda Stern, a Toronto-based bankruptcy trustee and vice-president with Deloitte and Touche Inc.

In Calgary, Mr. Alger said the recent layoffs in the oilpatch have yet to translate into higher bankruptcies, though he expects that to pick up in the next several weeks.

Many new bankrupts are connected in some way to the construction or housing markets, which were red-hot a year ago and have now cooled.

Mr. Alger said that, in Calgary, when house prices were soaring, many consumers borrowed against that new equity in their homes and now housing prices have tumbled back to earth, credit is no longer available, or is too pricey for those with outstanding second or third mortgages.

Others are tradespeople or contractors who are unable to make payments on equipment or tools bought during last year's boom.

"It's people that don't have a safety margin," said Mr. Alger. "If you're living paycheque-to-paycheque and the paycheque's gone, you're in trouble if you're servicing a bunch of debt."

Extending Mortgages

2009-03-19T08:42:00.000-07:00

A Toronto-based company built on extending mortgages to people who don't qualify for a bank loan, but without the disastrous results experienced in the United States, is increasingly being viewed as a takeover target.

Home Capital Group Inc., whose shares are trading at decade-low earnings multiples, fuelled the speculation last week when it adopted a shareholder-rights plan, or poison pill, which gives a company more time to drum up offers if there is a hostile bid.

But the 20% gain since then may have more to do with Home Capital's successful pursuit of a slice of the insured Canada Mortgage and Housing Corp. business dominated by the big banks that takes advantage of government incentives put in place late last year to stimulate lending.

"The government has been boosting the level of mortgages taken in through the CMHC programs and Home Capital has been able to ramp up activity here - the yield is good and the government takes on all of the default risk," says Jeff Fenwick, an analyst at Cormark Securities Inc. "Meanwhile, Home purposely eased back on some of the other areas where they lend ... as they had been concerned about the housing downturn in Canada."

Tarred by the fallout from the subprime mortgage meltdown in the United States, Home Capital's shares were off nearly 60% from a 52-week high of $41 last June before the recent rally that took the shares back to $23.64 yesterday.

Gerald Soloway, chief executive, said in an interview the company decided the tweak the business model beginning in the late summer of 2007, when the subprime crisis took hold in the U.S. and Canada's non-bank asset-backed commercial paper market froze.

The company has reduced loans-to-value to take falling house prices into account and reduce the risk of losses from defaults, and ventured into the 80% insurable portion of the $800-billion Canadian mortgage market that is the territory of traditional banks.

This month, Home Capital's $200-million mortgage business will be evenly split between insured mortgages that take advantage of the spread between bonds yields and rates, and the company's traditional mainstay of uninsured loans for those that can't get them elsewhere, Mr. Soloway says.

"At this point, the margins of selling into the Canada bond program are very good... We don't apologize for being somewhat opportunistic and taking advantage of a market," he says.

CMHC insured mortgage pools are priced using Canadian government bonds and with bond yields being very low, the spread between the average mortgage rate in the pool and the rate paid on Home Capital's mortgage-backed securities has made it an attractive area for the company to be, analysts say.

It seems likely that the big banks will take notice, especially because they are touted as potential buyers of Home Capital and have historically coveted the firm's healthy margins derived from higher interest rates on the loans that are perceived to be riskier.

But Mr. Soloway says there have been no formal or informal approaches from suitors.

"I'm the wallflower. No one's asked me to dance," he said, adding that implementing the shareholder rights plan, which is to be voted on by investors at an annual meeting in May, had been under discussion for some time.

As for the $1-billion in insured mortgages Home Capital could take from the banks this year, Mr. Soloway maintains that it wouldn't rock the boat because it would be a small fraction of an estimated $640-billion pie.

"Nobody at any of the big banks wakes up and says, ‘I've got to get Home, they're eating my lunch,'" he says. "It is significant for my business, but it's not enough to bother anybody else."

Mr. Fenwick, the Cormark analyst, said he doesn't expect any would-be buyers will make a move on Home Capital in the near term.

"A bank would be a natural buyer but given the current climate right now, I think it would be challenging to sell the idea to shareholders given that the media would label Home as a sub-prime lender," he said. "However, Home Capital has recently been trading at decade lows... and they may have been concerned about an opportunistic bid."

With no takeover premium in mind, Mr. Fenwick has a target of $30.25 on the stock. The company expects to deliver earnings growth of 10% to 15% this year.

Canada’s proactive approach to financial stability will limit risk

2009-03-13T06:28:00.000-07:00

The International Monetary Fund says that strong regulation helped Canada’s financial system hold up well amid the global financial crisis, but it still wants to see securities regulation rationalized.

In its latest report on Canada, the IMF says that the Canadian financial system “has displayed remarkable stability amid the global turbulence”, adding, “This outcome reflects strong regulation and supervision, along with structural factors in the Canadian financial market.”

That said, the organization cautions that “the coming credit cycle is likely to be challenging. The economic downturn will pressure bank credit quality.”

It notes that mortgage delinquencies are already rising, and household debt levels are a concern in an environment of rising unemployment and falling net wealth. “In this context, pressures on banks may feed back into tighter credit conditions, dampening growth. Meanwhile, major insurers and pension funds have been adversely affected by the stock market decline,” it says.

“Against this backdrop, the key policy priority remains forestalling an adverse macro-financial feedback loop. Along with the appropriately supportive stance of macroeconomic policies, the Canadian authorities’ proactive approach to financial stability will limit this risk,” it says.

Additionally, the IMF indicates that, “Consolidating and enhancing securities regulation would further strengthen the already robust financial stability framework. Over time, bringing a greater financial stability focus to securities regulation, and achieving greater national integration would provide a more holistic perspective to financial stability arrangements.” Therefore, it supports the federal government in following the recommendations of the Expert Panel on Securities Regulation.

On the macroeconomic front, the IMF sees further weakness in the short term. “Economic activity will likely decline further in the near term, before picking up on the back of the policy stimulus already in train,” said IMF mission chief, Charles Kramer, in a statement.

“Looking ahead, continued vigilance and readiness will be essential to respond to possible tail risks amid the economic downturn. With the global outlook marked by unusually high uncertainty, Canada has prudently taken proactive steps and should stand ready to act further in case downside risks appear,” Kramer added.

The IMF said it supports the “large, timely, and well-targeted fiscal stimulus” proposed in the latest federal budget. “The stimulus package is appropriately sized -- well above the Fund’s benchmark of 2% of GDP. It is also prudently based on a worse economic outturn than private sector forecasts. With sizeable infrastructure spending and permanent tax cuts, it is weighted toward items that are most effective in stimulating demand,” it added.

And, it approves of the Bank of Canada’s current monetary policy position, suggesting that, “maintaining an accommodative monetary stance will be appropriate given the disinflationary pressures associated with the recession.”

Federal finance minister Jim Flaherty welcomed the IMF's statement of support.
says that strong regulation helped Canada’s financial system hold up well amid the global financial crisis, but it still wants to see securities regulation rationalized.

In its latest report on Canada, the IMF says that the Canadian financial system “has displayed remarkable stability amid the global turbulence”, adding, “This outcome reflects strong regulation and supervision, along with structural factors in the Canadian financial market.”

That said, the organization cautions that “the coming credit cycle is likely to be challenging. The economic downturn will pressure bank credit quality.” It notes that mortgage delinquencies are already rising, and household debt levels are a concern in an environment of rising unemployment and falling net wealth. “In this context, pressures on banks may feed back into tighter credit conditions, dampening growth. Meanwhile, major insurers and pension funds have been adversely affected by the stock market decline,” it says.

“Against this backdrop, the key policy priority remains forestalling an adverse macro-financial feedback loop. Along with the appropriately supportive stance of macroeconomic policies, the Canadian authorities’ proactive approach to financial stability will limit this risk,” it says.

Additionally, the IMF indicates that, “Consolidating and enhancing securities regulation would further strengthen the already robust financial stability framework. Over time, bringing a greater financial stability focus to securities regulation, and achieving greater national integration would provide a more holistic perspective to financial stability arrangements.” Therefore, it supports the federal government in following the recommendations of the Expert Panel on Securities Regulation.

On the macroeconomic front, the IMF sees further weakness in the short term. “Economic activity will likely decline further in the near term, before picking up on the back of the policy stimulus already in train,” said IMF mission chief, Charles Kramer, in a statement.

“Looking ahead, continued vigilance and readiness will be essential to respond to possible tail risks amid the economic downturn. With the global outlook marked by unusually high uncertainty, Canada has prudently taken proactive steps and should stand ready to act further in case downside risks appear,” Kramer added.

The IMF said it supports the “large, timely, and well-targeted fiscal stimulus” proposed in the latest federal budget. “The stimulus package is appropriately sized -- well above the Fund’s benchmark of 2% of GDP. It is also prudently based on a worse economic outturn than private sector forecasts. With sizeable infrastructure spending and permanent tax cuts, it is weighted toward items that are most effective in stimulating demand,” it added.

And, it approves of the Bank of Canada’s current monetary policy position, suggesting that, “maintaining an accommodative monetary stance will be appropriate given the disinflationary pressures associated with the recession.”

Home Construction Will Continue To Drop

2009-03-11T06:13:00.000-07:00

Home foundations poured in Calgary slowed to a mere trickle last month, says data released yesterday by the Canada Mortgage and Housing Corporation.

Housing starts in the Calgary census metropolitan area, including single- and multiple-family homes, totalled 206 units in February, compared to 877 units one year ago.

That's a decrease of 76.5% and a drop to levels not seen since January 1991, when foundations for 170 units were poured.

Year to date, total housing starts in Calgary are trailing last year by nearly 72%.

Condominiums led last month's downturn, plunging an eye-popping 96.3% to 22 units.

Single-family home starts decreased 36.1% to 184 units during the same period.

At least two indicators suggest it'll get worse before it gets better: Unemployment in Calgary, as well as the rest of the province, is predicted to continue rising.

Statistics Canada will release the most recent employment statistics Friday.

Also, Bonnie Wegerich, president of the Calgary Real Estate Board, said MLS listings will rise this spring, which means that competition from the re-sale market won't abate any time soon.

But, Lai Sing Louie, senior market analyst for the CMHC, argues lower mortgage rates and home prices point toward stronger demand.

"The real estate market is re-pricing right now, and at some point in time, that will bring back in demand," he said.

Prices for new homes have been declining steadily since peaking at an average of about $647,000 last September.

The February average price was $619,211. Sing said the CMHC predicts prices will continue sliding this year.

Moreover, mortgages are getting cheaper as Canada's financial institutions follow the Bank of Canada by lowering their lending rates.

Given January's rates, which don't take into account the central bank's most recent rate cut, the mortgage payment on an average condominium, with 10% down and a 25-year amortization, came to $1,538, compared to $1,946 one year ago.

The combined housing starts of Alberta's seven largest cities totalled 574 units in February, nearly 70% lower than one year ago.

Canada cuts rate

2009-03-03T15:26:00.000-08:00

The Bank of Canada slashed its key short-term interest rate about as low as it can go Tuesday and said it may have to resort to extraordinary measures to stimulate the economy which, it acknowledged for the first time, is unlikely to recover this year.

The central bank did what most private-sector economists advised it to do, cut the trend-setting overnight rate to an all-time low of 0.5 per cent and Canada's commercial banks quickly followed, cutting their prime rate by half a percentage point.

The lower prime rate, which falls to 2.50 per cent on Wednesday, will benefit some mortgage holders but will have little or no immediate impact on many corporate borrowers or credit card holders and will further reduce some interest rates paid to savers.

Scotiabank chief executive Rick Waugh said at his bank's annual meeting in Halifax that the lower interest rates is "a step forward" for the economy but insisted that the No. 1 priority is to "stabilize the world financial system"

"There's a huge amount of incentives that the governments are putting in. But unless we get our financial sector stabilized, then all these incentives will not work as well," Waugh said.

Bank of Canada governor Mark Carney said earlier that even with the central bank's overnight rate at unheard-of lows, the stimulus provided by traditional monetary policy is likely not enough help for the economy.

And Carney said the bank now sees recovery coming later than it had last projected, possibly in early 2010 instead of the third quarter of this year.

"Given the low level of the target for the overnight rate, the bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing," Carney wrote in a statement.

From the outset, the central bank's January economic outlook had been described by many observers as overly optimistic but Carney has said since then that the outlook acknowledged both the potential upside and downside.

A lot depended on how the situation unfolded in the global financial system, Carney said at the previous rate setting on Jan. 20, coincidentally the same day Barack Obama officially became president of the United States.

Obama and his administration has been quick to push for several massive stimulus efforts, aimed at propping up the financial sector, the automotive sector and some hard-hit American consumers, such as homeowners who are unable to afford their mortgages.

While the Canadian economy as a whole has been shrinking dramatically, as a result of lower U.S. and world demand for oil, gas, minerals and manufacturing goods, the Canadian banking system continues to be solid and the five biggest banks remain profitable.

The Bank of Canada didn't give specific examples on Tuesday on what type what specific measures are available to provide monetary stimulus to the Canadian economy, which shrank by 3.4 per cent in the October-December quarter.

BMO deputy chief economist Doug Porter said the central bank is considering a process whereby it injects money into the financial system by buying up assets such as government bonds, asset-backed commercial paper and even corporate bonds directly.

"Simply put, the bank is preparing to pull out all the stops to support the economy," Porter said.

Canada's major banks appeared ready to play ball with Carney: shortly after the announcement, Royal Bank (TSX:RY), Bank of Montreal (TSX:BMO), TD Bank (TSX:TD), CIBC (TSX:CM) and Scotiabank (TSX:BNS) announced that they would cut their prime rates by half a percentage point, in step with the central bank.

But while variable mortgage rates tied to prime are being reduced, longer-term and fixed rates have not kept pace with the central bank's moves, partly because chartered banks are reluctant to lend into a recession for fear of failures and partly because their own borrowing costs are higher than would be expected.

Still, Jim Rawson, a regional manager Toronto-based mortgage firm Invis, says the most recent cut in combination with measures in the government's January budget will increase borrowing.

"A lot of people will be interested in re-financing mortgages and it will spur a lot of first-time buyers," Rawson predicted.

The federal budget, yet to make its way through Parliament, offers $750 in tax relief for first-time home buyers while increasing the limit that can be withdrawn from RRSPs for a down payment by $5,000.

"Quite honestly, people are saying nobody is buying, but there seems to be a lot activity right now. In my region, applications doubled in January from December," Rawson said.

By most measures, Canada's credit markets are in better shape than in most industrialized countries, although still far from normal.

Carney has noted that while Canada's chartered banks continue to lend, many other financial institutions have tightened their practices or shut down altogether, reducing the availability of credit as a whole.

His reference to non-traditional monetary measures confirms that the central banker knows he has exhausted interest rate cuts as a means of stimulating lending and borrowing in the economy.

Darcy Briggs of Bissell Investment Management in Calgary said the bank could trim rates to 0.25 per cent - and likely will, as the U.S. Federal Reserve has done - but "practically, what would that do?"

There are technical reasons why a zero interest rate is impractical, economists say.

The other surprise in Tuesday's statement was that Carney appeared to back off his relatively rosy forecast for the Canadian economy, which envisioned growth returning in the third quarter of this year and rebounding to 3.8 per cent next year.

"The outlook for the global economy has continued to deteriorate since the bank's January... update, with weaker-than-expected activity in major economies," Carney said Tuesday.

"National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January."

Carney said potential delays in stabilizing the global financial system, along with low consumer confidence and larger hit on household wealth, "could mean that the output gap will not begin to close until early 2010."

Tuesday's statement does not officially alter the forecast, but strongly implies that both this year's 1.2 per cent contraction will be worse and that the recession may last until next year.

"Reading between the lines, it's a safe assumption that their (January) forecast has already gone out the window," said Porter.

Most economic indicators have come in far weaker since January's much-criticized bank outlook, including Monday's report that the Canadian economy has shrunk by 3.4 per cent in the last quarter of 2008, far worse than the bank's negative 2.3 per cent projections.

As well, Canada lost 129,000 jobs in January, a massive amount, which Carney did not know when he made his forecast.

But possibly the most critical factor is that the global economy, especially among industrialized nations, appears to be in free-fall.

The fourth quarter saw GDP fall by 6.2 per cent in the United States, six per cent in the United Kingdom, 5.7 per cent in the Eurozone, 10.3 per cent in Mexico and a massive 12.7 per cent in Japan.

And far from stabilizing, the U.S. financial system is lurching from crisis to crisis. On Monday, the U.S. government said it was adding another $30 billion to the bail-out package for the giant insurance company American International Group Inc. after it reported a staggering US$61.7-billion in quarterly losses.

"Stabilization of the global financial system remains a precondition for the global and Canadian economic recoveries," Carney noted in his statement.

How did we miss the economy's warning signs

2009-02-24T07:30:00.000-08:00

Early last year, the Bank of Canada forecast the country's economy would grow by 2.8 per cent in 2009; predictions that $200 (U.S.)-a-barrel oil was in view seemed plausible; and subprime mortgage losses in the U.S. were widely expected to cause little more than a temporary slowdown.

Needless to say, things haven't turned out that way.

Canada's central bank now sees the economy shrinking by 1.2 per cent this year. Oil prices have plunged below $40 (U.S.) a barrel, after peaking last summer at around $147. And the insidious effects of the subprime mortgage crisis have raced around the world, triggering what many are calling the worst economic crisis since the Great Depression.

It hasn't been a good year for those who make their living predicting the economy. As Bank of Canada governor Mark Carney wryly noted in a speech in December: "Few forecast these events, although in an outbreak of retrospective foresight, an increasing number now claim they saw it coming. The reality is that among all the banks, investors, academics and policy-makers, only a handful were able to identify ahead of time the causes and potential scale of the crisis."

The few who warned of impending danger were often ignored or written off as cranks. Nouriel Roubini, an economics professor at New York University, earned the nickname "Dr. Doom" after making dire predictions about a U.S. economic collapse long before most people started piecing things together. Now, he is widely viewed as a prophet of the financial crisis.

Meanwhile, jokes are flying that economic forecasters are about as reliable as meteorologists – which is to say, not very.

So how could so many economists have missed the scale of this crisis?

For one thing, they're just not that good at forecasting "turning points" like recessions.

"This is not unique. If you went back to the forecasts in the early 1980s and early 1990s, they weren't very well predicted either," said Don Drummond, chief economist at Toronto Dominion Bank.

Adding to the problem was the fact that the usual symptoms weren't present this time. The last two recessions were "pretty much textbook form," Drummond said. They were preceded by rapid growth and spikes in inflation, which prompted central banks to jack up interest rates and crash the economy in the process. Inflation started coming down, the central banks lowered interest rates and the economy recovered.

"So in that sense, even though the forecasts weren't great, there wasn't that much rocket science involved in doing them," Drummond said. "There was a playbook and you could kind of look back at previous cyclical experiences."

But the current crisis threw many forecasters for a loop, although Drummond said his own bank had the story "dead-on from 2005 on that these subprime mortgages in the U.S. were just going to be the death of us all," even though its timing was off in spots. There was no run-up in inflation, and interest rates started going down, not up, fairly early in the process, Drummond said. There was also a new element this time around: the seizing up of credit markets in the United States and elsewhere.

Economic forecasting doesn't adapt well to novel situations.

"If you have something happening that has happened in some way before, then you have a chance of forecasting it," said Peter Dungan, professor of business economics at the Rotman School of Management at the University of Toronto. "If it's a new thing, you don't have much chance ... What happened this time was largely new."

Human nature may also have had something to do with the fact that so few economists went out on a limb.

"There's a considerable reward for being the outlier and being right, but I think there's a severe punishment if you're an outlier and you're wrong because then you really look bad," Drummond said. "It's not like everybody missed it. You alone missed it."

Or, as U.S. economist Edgar R. Fiedler once bluntly observed, "The herd instinct among forecasters makes sheep look like independent thinkers."

There was also a general feeling until late last summer that turmoil in financial markets wasn't going to spill over significantly into the real economy.

"That was a reasonable assumption, because we've seen quite a few upsets in the financial side of the economy without there being an awful lot of negative impacts on the real side," said Dale Orr, chief economist for Canada at IHS-Global Insight.

That changed in the fall as financial institutions teetered in the U.S. and elsewhere and the full scope of the crisis started to become apparent. Some economists admitted they were stumped.

"Trying to do an economic forecast in this kind of turmoil is a bit like trying to put a value on your house while the kitchen is on fire," Douglas Porter, deputy chief economist at BMO Capital Markets, said in October.

Around the same time, economic forecasters at the University of Toronto put out an unusually frank release that was titled, in part, "We don't have a clue and we're not going to pretend that we do."

Despite all that, economic forecasters continue to forecast, and governments, the financial sector and ordinary people continue to dissect their prognostications.

Glen Hodgson, chief economist at the Conference Board of Canada, said forecasts are based on "incredibly complicated mathematical models" – some 1,250 equations in the case of his organization's Canadian forecast.

"Forecasters, frankly, are always wrong," said Hodgson. "Nobody is ever spot-on on all the variables. It's a question of trying to minimize the error on each of the key variables, and our track record is probably at the top of the chart there over the long term."

Forecasters also often have to make their calls without all the data in front of them. Economists started making dire predictions for 2009 last fall when economic growth figures were available only from the first half of 2008, Orr said.

"It's probably better than what most people think it is because they don't take account of what data you actually have in hand," Orr said. "On the other hand, if I'm giving talks to engineers, for example, I have to really emphasize that economics is a social science."

He added that, since the economy went into freefall in September, IHS-Global Insight has "consistently been ahead of most other forecasters in foreshadowing the tough times ahead."

But even now, forecasters don't seem to be able to get it right. No one was more surprised than economists when Statistics Canada reported earlier this month that 129,000 jobs had evaporated in January. The consensus had called for only 40,000 net job losses.

Forecasts for Canadian economic growth in 2010 are all over the map. The low is around 1.6 per cent. The highest forecast, from the Bank of Canada, is 3.8 per cent, a figure that has raised eyebrows.

"It fascinates me, the criticism the Bank of Canada has received on its forecast," Drummond said. He noted that TD's forecast is less optimistic than the central bank's, but said that 3.8 per cent growth "is not that heroic" after two years of weakness.

"It's a little bit odd for one forecaster to be throwing a stone at somebody else's glass wall," he added.

Housing starts fall 11% in January

2009-02-16T07:07:00.000-08:00

Housing starts declined last month in Canada as falling sales for existing homes weakened demand for new construction, Canada Mortgage and Housing Corporation said Monday.

Construction began on 153,500 units in January, on a seasonally adjusted annual rate, down from 172,200 the previous month, CMHC said.

Urban housing starts dropped 15.6% to 126,700 units last month, with single units falling 20.2% to 50,000 and multiple dwellings declining 12.1% to 76,700.

"To a certain extent, the decline in housing starts coincides with recent developments in the existing home market," said Bob Dugan, CMHC's chief economist.

"Reduced sales and increased listings in the existing home market have led to reduced spillover demand in the new home market."

All regions of Canada saw declines in housing starts in January, CMHC said.

Urban construction fell 8.6% in Atlantic Canada, while Quebec experienced a 1.4% drop, Ontario at 14.6% decline, the Prairies 30.3% and British Columbia 29.1%.

Meanwhile, there were 26,800 units stared in rural areas.

Charmaine Buskas, economics strategist at TD Securities, said Canada's housing market "is under a great deal of pressure."

"The combination of an increasingly weak labour market and lingering concern about the state of the economy has left consumers unwilling to take the plunge into the housing market," she said.

"The correction in Canada's housing market continues to unfold and it appears the pace is a bit quicker than we had originally anticipated. In the face of continued economic weakness, housing may not see a rebound until early 2010."

Worst economic crisis

2009-02-08T10:22:00.000-08:00

Canada and its major trading partners are facing the worst economic outlook since the oil crisis of the 1970s, the Organization of Economic Co-operation and Development reported Friday.

A barometer measuring the composite leading indicators (CLI) for the economies of OECD member countries showed a 1.1-point dip to just below 93 points in December, putting it 8.2 points below its level for the same period in 2007.

Canada's score fell the same 1.1 points, to 93.4, in December, down 7.2 points from a year earlier.

"The CLIs in most OECD countries have fallen to levels that were last seen during the oil shocks of the 1970s," stated the Paris-based agency.

"The outlook has significantly deteriorated in the major non-OECD member economies who are now also facing strong slowdowns."

The OECD is a think-tank funded by the governments of 30 European, North American and Asian democratic industrialized countries.

The CLI is intended to give early signals of the business cycle's turning points. An economic expansion would be indicated if the CLI was above 100 and increasing, while a downturn would be marked by the index decreasing but still above 100.

In economic parlance a CLI that's both falling and below 100 - the status for all countries cited in Friday's report - signifies an economic slowdown. A beacon for a recovery would be a CLI increasing but still below 100.

Every country but Brazil is considered to be in a "strong slowdown," according to the OECD. Brazil is simply listed as being in a "slowdown," as its score has dropped 1.8 points in December but a relatively modest 5.4 points from December of 2007.

The hardest-hit economies cited in Friday's report were non-OECD countries such as Russia, down 3.8 points in December and 17.7 for the year.

China was also one of the worst performers, down 2.4 points in December and 14 points over the 12-month period.

Among OECD members the U.S. was down 1.4 points in December and 9.5 for the year, while Germany - traditionally Europe's economic engine - fell 1.6 points and 11.8 points, respectively.

Economic Crisis on Mortgage Rates Predictions

2009-01-28T06:03:00.000-08:00

There were so many analyst and experts in the mortgage industry who have mess up their projections and analysis. The present form of economic crisis is much different from previous occurrence making it very difficult to make mortgage rates predictions.

Mortgage rates predictions are based on various collected data and models that the previous years have produce. Thus, using the same old type of analysis may not be as useful as it used to be.

The economic and financial crisis that we are experiencing now has too many twist and turns. So many variables are contributing to the effects on our finances and the economy. With the Government and the Federal Reserve doing everything they can do to prevent a massive economic meltdown, making assumptions and predictions can make a fool out of an expert.

There are so many indicators of inflation and mortgage rates that going in different directions. When these factors and indicators are going separate ways instead of the usual way, it makes these analysts work double time on how to catch up with the changes.

With almost a years now into the mortgage and financial market mess and we still see new problems that keep on propping up. Almost all banks around the world are having big time troubles with both their lending and borrowing. And as we can all see now, it is just starting to crack open some little window because of the massive bail outs and government intervention. Without the federal and government infusion of this massive cash flow to the financial sector, it would be huge disaster that affects the entire world. Thus, it affects how these mortgage experts calculate and make mortgage rates predictions a fair assumption.

Surprisingly, the American mortgage markets are still functioning better compared to the rest of the world. This is mainly because of the massive dole outs by the Federal Reserve to keep most of the biggest engines of the financial markets afloat. This was done by the government to prevent them from total collapse and keep the investors and the affected parties within a manageable level. Because without the access to these banks and financial institutions, lending and borrowing would crippled and may lead to or contribute to the economic downturn.

It will always be a matter of how fast these factors respond and to whatever degree is the key to making sound predictions and projections. For instance, there will be a concern if the LIBOR rate goes up and making it less affordable to many people. But most mortgages rates analyst are most likely to concentrate on the fixed term rates which are at the moment at a very low six percent.

It is not easy nowadays to make mortgage rates predictions because of many different variables that are coming into play. Especially with government intervention, nobody knows where it would really end as the flow of cash is still unknown where it would make a difference. Now that the current financial and economic turmoil is out of the ordinary, most people and experts as well can hardly make up where rates will go. The effects of the economic crisis on mortgage rates are something that is not seen yet thus making it more difficult to make a sound analysis.

Mortgage Basics

2009-01-20T05:40:00.000-08:00

The dream of owning a home is something that is on just about everyone's lifetime goal list. It's one of the things that in some ways signals that we have made it in life and can bring great pride and a sense of accomplishment to many. For many who pursue that dream it can be a confusing undertaking if they are not prepared for the home buying experience.

Without a doubt one of the most confusing and often misunderstood parts of the home buying experience is the mortgage process. Sadly, most of us do not have the money to just buy a home outright, so we turn to mortgage lenders to help us finance the home of our dreams.

One of the first things anyone who is interested in owning their own home should understand is the role credit plays in the mortgage process. You are getting ready to ask a lender to make a sizeable loan to you for an extended period of time - often upwards of 30 years. For them to take on this risk, they need to evaluate your creditworthiness - or your ability to pay the money back. They typically look at items such as your credit report which lists how you have dealt with other creditors in the past, your total household income and the price of the home you are willing to buy and where it is located. Based on this information they then decide on whether to extend you the loan and at how much interest.

Interest is an important concept to understand because over the lifetime of the loan you can expect to pay back double the amount of the loan value based on the interest rate - that $150,000 house has suddenly cost you $300,000. Your goal in the mortgage process is to get the absolute lowest interest rate you can.

You also need to know how much house you can afford. Most mortgage lenders typically look for you to spend no more than 30% of your monthly income on house payments. Of course, the longer the mortgage term and the lower your interest the more house you can afford to buy. It is important to buy something you can easily and comfortable afford - the last thing you want to do is find yourself in a crisis situation unable to pay your monthly mortgage payment!

Next, be sure you have saved up a sizeable cash reserve before jumping into the home buying process. You are going to have to pay things such as closing costs (which can be upwards of 5% or more) and pay as much of a down payment as you can to reduce your loan amount as much as possible. You then will want to have a little reserve left over to furnish your new home and take care of any needed repairs - remember, you own it now and it is up to you to repair it if something breaks!

If you are confused about the mortgage and home buying process, don't feel as if you are alone. Many people share the same concerns and fears as you do. Often times in your community there are local first time home buyer groups that meet with experts from the banking and real estate industry there to answer your questions. Ask your realtor about whether such a group exists and when the next meeting is. The home buying process doesn't have to be a terrifying experience, and if you come prepared you can win big by getting the best deal possible on your mortgage while getting the house of your dreams.

2009 - Financial troubles in Canada

2009-01-07T09:36:00.000-08:00

Canadians should brace themselves for another year of trouble in the domestic economy, and it could even be worse than last year.

That's according to some of the country's economists leading bank who are projecting that the global economic struggle will gain momentum in Canada during early 2009.

At a gathering of economic minds at the Economic Club of Canada in Toronto, TD Bank chief economist Don Drummond said challenges faced by the U.S. will start to be felt more keenly in Canada during the first quarter.

The global economic meltdown will continue to affect the country for at least the first half of the year before it returns to growth, which will even then be lower than normal.

Bank of Montreal economist Sherry Cooper says she believes government policies and monetary stimulus will bring the country out of a recession.

"At the end of the day will have outperformed much of the rest of the world, certainly the rest of the G7," she said.

Critics have questioned whether Ottawa should cut taxes as part of a broader effort to stimulate the economy.

On Tuesday, Finance Minister Jim Flaherty made it clearer that a economic stimulus plan would likely include tax cuts to encourage retail and other spending.

"My hope is that if we do get a tax cut it is not just temporary," Drummond said, noting that temporary tax cuts just tend to shift the timeline on when Canadians decided to make big ticket purchases.

"If we're going to see any tax relief in the name of aiding the economy we have to see something permanent."

Mortgage and consumer debt default

2008-12-17T05:40:00.000-08:00

House prices across Canada fell nearly 10 per cent and sales slipped 42 per cent in November compared with the same month last year, a drop the Canadian Real Estate Association says it hasn't seen since the last housing recession nearly two decades ago.

"What struck me, with the exception of a couple of markets, is that there has been a very sharp decline in sales activity over the last couple of months," said Gregory Klump, chief economist at the Ottawa-based association also known as CREA.

CREA said 27,743 homes were sold last month across Canada, a drop of 12.3 per cent compared to October and "the lowest level for monthly activity since January 2001." That follows a 14-per-cent sales drop in October, compared to the previous month.

Klump said he hasn't seen this type of month-to-month dropoff since 1989, "as we entered the last housing recession."

Housing and commercial real estate prices plunged in the late 1980s after a runup of several years when the economy was booming. The housing decline led to a price drop of up to 20 per cent in many markets and was triggered by rising mortgage rates and the lingering impact of the 1987 stock market crash

Klump cites the current recession and tighter credit markets as reasons for the latest sales slump.

"What we are seeing is a broad trend across Canada of very cautious buyers, and very cautious lenders," Klump said.

Part of the problem, Klump said, is that few people are able to secure mortgages.

Klump said he is hearing a "growing body of anecdotal evidence" that buyers who received pre-approved mortgages are no longer approved when it comes time to close the sale of their home.

"The last time I heard about such things happening ... would have been at the last housing recession," he said.

The biggest year-over-year sales decline was in British Columbia, where sales fell 62 per cent year over year.

"It is one of the markets that had a big run up in price. They are also one of the first provinces where buyers became cautious in recent months," he said.

Klump estimates the drop in sales translates into at least $2.8 billion less in spinoff consumer spending, which includes everything from new furniture and appliances to renovations.

November home sales totalled $7.9 billion, down 11.7 per cent from the previous month and the lowest level since January 2004, CREA said.

Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, said there's no question lenders are being more thorough in reviewing their borrowing customers in the current economic environment.

"However, if you have steady employment, a good income and a healthy credit score you shouldn't have any difficulty in securing a mortgage," Murphy said.

Scotiabank economist Adrienne Warren agrees there is more scrutiny from lenders today. She also pointed to Ottawa cancellation of the 40-year mortgage product in October, which has resulted in some "buyers at the margin being unable to get credit."

Warren said the sales drop is due to many home buyers putting off the purchase in the current recessionary environment, where layoffs are being announced across all industries.

"It's understandable buyers are nervous," Warren said.

"Stock market declines are also pushing people to the sidelines for the time being."

TD Bank economist Millan Mulraine said in a note to clients that the new housing report "underscores that the Canadian housing correction continued in earnest in November ... . However, the deceleration in the pace of home price depreciation does offer a silver-lining in this report - albeit marginal."

The Bank of Canada warned last week that mortgage and consumer debt defaults could rise "significantly" if the global financial crisis deteriorates. It said the number of "vulnerable households" - the three per cent with a debt-to-income ratio above 40 per cent - could double by the end of next year under this pessimistic scenario.

The central bank notes that this would be a worst-case scenario. It said the "most likely outcome" is for global markets and credit conditions in Canada to gradually improve.

Merrill Lynch Canada economist David Wolf said while the percentage of mortgage delinquencies in Canada is low, at 0.29 per cent of about 3.9 million mortgages as of September, it's a 17 per cent year-over-year increase.

Wolf said that is the biggest rise since 1996, and that delinquencies in Alberta, where house prices started falling first, were up 130 per cent.

He said the delinquency rate should in fact be lower, noting that in January 1990, "right around the peak in house prices and just after the cyclical trough in unemployment" mortgage arrears in Canada were at 0.18 per cent. He notes they nearly quadrupled over the following two years.

"The current relatively low level of delinquencies has masked a disturbingly large recent uptrend again, even before things really fell apart this autumn," Wolf said in a note to clients late last week.

He also cited a Bank of Canada study released a year ago that said mortgage default rates would rise to 2.25 per cent under a "very extreme" scenario of a 23 per cent aggregate drop in house prices.

"In sum, the relatively low level of mortgage arrears in Canada is of no comfort to us. Delinquencies are a lagging indicator. Relying on them as a forecasting tool is like driving while looking in the rear-view mirror. It's a good way to crash," wrote Wolf, who in recent reports has has turned bearish on the Canadian housing market.

A few months ago, he predicted Canada's housing market is following the same troubled path that eventually led the United States market into a major downturn, but with a two-year lag.

He noted that U.S. resale home prices accelerated through 2005, peaked in early 2006 and have declined ever since. Meanwhile, Canadian resale home prices accelerated through 2007, peaked in early 2008 and have been falling.

He has also challenged the prevailing view that Canada's housing and mortgage markets are more stable than their U.S. counterparts, warning that households in this country are so indebted that it's only a matter of time before we see a major downturn here as well. .

Bank of Canada warns of possible debt, mortgage defaults

2008-12-11T20:04:00.000-08:00

A significant number of Canadians are at risk of defaulting on mortgages and other loans if the global financial crisis deteriorates and triggers a deeper recession, the Bank of Canada warns.

In a sobering assessment of the financial crisis, the central bank concludes that significant risks remain for both the global economy and Canada if credit conditions don't begin to improve.

"With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and record-high debt-to-income ratios, a severe economic downturn could result in a substantial increase in default rates on household debt," the bank writes in its December financial systems review released Thursday.

The Bank of Canada says the number of "vulnerable households" - the three per cent with a debt-to-income ratio above 40 per cent - could double by the end of next year under this pessimistic scenario. That would mean tens of thousands of households could face crushing debt as Canadians lose jobs and family incomes drop to the point where they can't pay their bills.

The central bank notes that this would be a worst-case scenario. The "most likely outcome" is for global markets and credit conditions in Canada to gradually improve, it states.

This is partly because central banks and governments around the world have leaped into action with extraordinary measures such as cash injections, asset swaps and credit guarantees to backstop financial institutions to pump addditional billions of dollars of credit into the economy.

But the Canadian central bank's top officials also warn that the crisis is far from over and that there is "a significant risk of mutually reinforcing weakness in the financial sector and in the real economy."

That's the kind of negative feedback that felled the American economy, noted Douglas Porter, deputy chief economist with BMO Capital Markets, the brokerage arm of Bank of Montreal, adding it is no longer far-fetched to think it could happen here.

"Given the fact we're looking at the recession in the teeth, some of the worst-case scenarios have to be studied a little more closely," he said.

"It looks like we're going to get as close to the bank's worst-case scenario than anyone would have imagined possible as recently as three months ago."

After resisting the call for months, the Bank of Canada declared the economy in recession Wednesday when it slashed its trendsetting interest rate to the lowest level in 50 years at 1.5 per cent.

Most economists are forecasting growth at or below zero for 2009 with job losses of more than 100,000 and an unemployment rate above seven per cent.

For much of the last year, experts said the Canadian economy would perform better than the recession-ravaged U.S., where the housing, financial and manuufacturing sectors have been battered and the services sector is now feeling the effects.

But now, the slump in the auto, manufacturing and forestry industries in Ontario and Quebec has spread to the resources-based West as oil projects get shelved because of low crude prices and mines close because of slumping prices for nickel, copper, zinc and other primary metals.

Pressure is mounting on the federal government to shock the economy into recovery with a big stiumulus spending plan in its Jan. 27 budget. Late Thursday, Bank of Montreal's Porter urged Ottawa to spend as much as $16 billion next year to arrest the economy's slide into recession.

Porter said such a package should include spending on roads and bridges as well as a one-time bonus for seniors on public pensions, temporary cuts to payroll taxes and the GST, and spending vouchers that would give Canadians government cheques on the condition they spend rather than save.

As well, Porter says Ottawa should consider a one-time financial transfer to the provinces, which could put the money more directly to use.

Given the rising uncertainty, the Bank of Canada officials outlined five potential risks for the world and Canada, including a deeper and more prolonged recession as banks compelled to restore cash reserves tighten the screws on credit conditions even further.

For Canadians, the repercussions will be profound - higher joblessness, lower income growth and more home defaults from crushing debt loads, the bank says in its worst-case assessment.

And while Canadians' access to credit has not tightened significantly during the financial crunch, this could change if the crisis persists, the bank says.

The risk assessment is noteworthy for its predominantly gloomy outlook - although it remains a hypothetical one - and for the fact it was written by the bank's governing council headed by governor Mark Carney, rather than by lower-rank bank staff as is usually the case.

In the United States, millions of Americans have lost their homes in the last two years with the collapse of the sub-prime, or high-risk mortgage market, which led to sharply higher interest rates for homeowners with poor credit and produced widespread foreclosures.

In Canada, however, the housing sector has been more stable, but the jump in home prices that led to soaring values in Vancouver, Calgary, Toronto and other cities has begun to reverse. Statistics Canada reported Thursday that new home sales fell for the first time in a decade in October, dropping 0.4 per cent from September.

According to the latest figures compiled by the Canadian Bankers Association, the percentage of mortgages that have gone unpaid for at least three months as of September was 0.29 per cent, or 11,362 of about 3.9 million mortgages in the country. Arrears in the U.S. are 6.5 times higher.

"Canadian trends are stable. American trends are worsening," according to the bankers' group.

In its report, the Bank of Canada says consumer debt woes will also cut deeply into bank profitability. In their recent financial reports, the six biggest Canadian banks reported a 38 per cent drop in profits for the just completed 2008 fiscal year to about $12 billion.

Much as has happened in the U.S., the central bank officials say the contagion could spread through the banking system and further restrict the availability of credit.

The Bank of Canada does caution that the vulnerability of Canada's housing sector should not be overstated.

It notes that lending practices in Canada have been far more conservative than those in the U.S. and that subprime mortgages account for about five per cent of the market as opposed to 14 per cent in the U.S. Banks are also insulated for defaults through government guaranteed mortgage insurance.

As well, although debt is high, low interest rates means that at present most households are able to comfortably manage their financial obligations.

Merrill Lynch economists David Wolf and Carolyn Kwan warned back in September that Canada was experiencing a similar housing meltdown as occurred in the U.S.

But Derek Holt of Scotia Capital agreed with the Bank of Canada that the situation here is not as dire.

"If we start off by looking at the household balance sheet it's 20 cents in debt for dollar of assets in Canada versus 26 cents in the United States. So we have 30 per cent less debt per each dollar," he explained.

Housing market

2008-12-08T08:36:00.000-08:00

Canadian housing starts fell to 172,000 at a seasonally adjusted annual rate last month, down from 211,800 in October, Canada Mortgage and Housing Corp. reported Monday.

The rate of urban starts decreased 21.6 per cent month-over-month to 144,800 in November, with declines in all parts of the country as volatile multiple starts tumbled 29.1 per cent to 81,700 while single-family starts eased 9.0 per cent to 63,100.

The November numbers "remain consistent with our forecast, which calls for more moderate activity of 212,000 units this year and 178,000 units next year," commented CMHC economist Bob Dugan.

"Note that at the beginning of the new millennium, Canada posted strong housing start levels given a pent-up demand that existed then. Over the last few years, this excess demand gradually decreased and our forecast for 2008 and 2009 reflects this new reality, with housing starts more aligned with long run demographic demand."

For the first 11 months of 2008, total residential construction starts were down 7.6 per cent compared with the corresponding period of last year, with urban single starts down 18.4 per cent but multiple-unit starts up 8.6 per cent.

The CMHC numbers concide with a Royal Bank report saying the housing sector is entering a cyclical downturn but the risk of a U.S.-style meltdown is remote.

RBC senior economist Robert Hogue says many factors that triggered the U.S. housing collapse are absent or much less evident in Canada.

He predicts the housing market will hold up even as a sluggish economy threatens income growth and erodes consumer confidence, because subprime mortgages are not prevalent in Canada, while the banks are stable and households are generally not overstretched financially.

"These factors should provide enough of a foundation to prevent housing markets from spiralling down even as the Canadian economy slips into recession," Hogue added.

Mortgage rates dropped by 2 Canadian banks

2008-12-01T07:15:00.000-08:00

Two Canadian banks did their bit to unclog the country's constricted housing market Wednesday by cutting mortgage rates.

The Royal Bank of Canada and the Bank of Montreal both chopped borrowing costs for people seeking to buy a home.

RBC cut its mortgage rates by one-quarter of a percentage point for most of its loans with terms ranging from six months to 25 years.

The exceptions were the one-year closed and four-year closed mortgages. Both of those products saw their rates slashed by three-quarters of a percentage point. The one-year vehicle now costs 5.60 per cent while the four-year mortgage rate is 6.29 per cent.

BMO marched down a similar path but at a different pace.

A three-year variable-rate mortgage from the chartered bank now has an interest rate 50 basis points lower at 5.0 per cent.

In its biggest move, BMO knocked the rate on its one-year fixed closed mortgage by 1.05 per cent to 5.60 per cent. The only three-year mortgage making the RBC list was closed, with an interest rate of 6.45 per cent.

Interest rates have been falling as central banks cut prime lending charges and pumped trillions into the global financial system in an effort to get lenders lending and borrowers borrowing once again.

To some degree, rates have fallen as the financial crisis gained momentum.

According to the Bank of Canada, a one-year conventional mortgage had an average interest rate over the past 20 months of 6.94 per cent. That compares with a current rate for the same borrowing vehicle of 6.35 per cent.

In many cases, lenders try to match the terms of their lending with the conditions regarding the cash they in turn borrow to fund the mortgage.

Thus, to fund a five-year mortgage, a bank might issue a similar-length bond.

So the comparable rate for long-term mortgages might be the lengthier GIC or government of Canada bond. And these investment vehicles tend to have higher interest rates than GICs or bonds of a shorter duration.

Mortgage Rates - 4 Choices

2008-11-21T05:33:00.000-08:00

Home mortgage rates are in a period of flux during the credit crisis going on at this time in the Canada. You will still be able to find decent rates for a home mortgage, but you will need to work a little harder than you would have a few months ago. It is important to determine which if any of the mortgage types and rates are appropriate for your particular home mortgage situation. Information is available on line, or you can visit with a local lender in order to determine the best route for you to follow. Panic buying is never the answer, so you should take time to research your path in advance.

Fixed Mortgage

Perhaps the most typical of the home mortgage rates and packages until fairly recently, chronologically speaking, is that of the fixed mortgage. If you hold a mortgage with an eight percent rate and a thirty year term with twenty percent down, it probably is an older mortgage. Today, the fixed Canada mortgages still are often 30 year mortgages, but they may also be 12 years terms, 15 year terms, 20 year terms, or other negotiated packages. The rate of interest will vary according to the term and the credit worthiness, but it does not change over the term of the loan.

Variable Mortgage

In recent years, as more people in this country wanted to participate in the American dream and own their own home, more and more borrowers took out the mortgage packages with home mortgage rates known as a variable mortgage. A variable mortgage has a set term which usually consists of a low introductory rate and a second phase in which the mortgage varies according to some preset index. An example is tying the mortgage rate to prime rate. The original period may be fairly short followed by a balloon payment.

Balloon

A balloon payment is another way to finance and maintain low home mortgage rates in order to 'sell' the mortgage to the lenders. The borrower agrees to have low or zero mortgage rate for a very short time with the expectation that the income will be increasing before the balloon payment comes due. This can be a risky type of home mortgage, but it also works well for people who are in certain types of financial situations. You are the best judge of whether or not to use the balloon mortgage type of loan arrangement.

Reverse Mortgage

A special type of home mortgage rates is one known as a reverse mortgage. This is often taken out by a senior citizen who owns their own home. It can be a way to fund health care. It taps the equity in the house and pays the owner over the life of the person taking out the mortgage. This type of mortgage is probably one of the least understood of all the mortgage types. This should not be entered into lightly. Find out exactly what the long term effects will be in your own situation.

Mortgage Loan

2008-11-14T08:15:00.000-08:00

Mostly people have to go for mortgage loan at one time or other. Many options are out there for mortgage in the market. The numbers of choices in front of you will be so much so that you will be surprised by seeing overwhelming number of options. How to select one from all these options? What is the right mortgage loan? Mainly the interest of the loan is the deciding factor of the selection. One should be extremely careful about the options on the interest rates. You require the absolute knowledge of the in and outs of these varieties of interest rates.

As all of us know there are two varieties of Mortgage refinance loan interest rates. One is the fixed rate and other is variable rate. Both are having advantages and disadvantages. Variable rates will be usually less than the fixed rates. This is a great benefit with the variable interest rates. But there are many more demerits for it. Variable rates, as the name suggests, will vary from time to time in accordance with the economic conditions of the country and state. As all of us know the present situation is such that the interest rates are just sprucing up. It simply rises month by month in accordance with the wholesale price index, inflammations and the Governments measures and policies to contain the price rise and the expected economic recession.

Variable prices will become a burden on the head if the interest rate goes up just like in the present situation. You can get some clearer picture of it. When you have taken the mortgage loan, you must have estimated the monthly repayments to be carried out. With this assumption you must have made a tight budget to keep moving the family and simultaneously pay off the loan amount in installments. But by the heavy rise in the interest rate, made your entire budget in shatters. Now you have to pay more money as mortgage repayments and obviously you have to cut down other expenditure. But mostly what happens is that, you will be forced to default the mortgage payments and you will end up with bad credit history. In this situation you will have to go for mortgage refinance loans as well.

As far as the fixed interest rates are considered, it will be better than variable rates. Here the demerit comes in the form higher interest rate compared to variable interest rate. Once if you select a fixed rate, you will be paying the same interest rates all through the tenure of the mortgage loan, irrespective of the economic fluctuations. You will have the prior knowledge of the monthly repayments you have to make. This will ensure you a proper planning of the family budget. This is a very important aspect. Now knowing the merits and demerits, you can decide up on the interest rate option for the mortgage loans. You can search on online loan lenders website to get the actual rates they offer for mortgage loans.

Discount Mortgages

2008-11-12T20:57:00.001-08:00

Discount mortgages are a type of mortgage product that have a variable interest rate which moves roughly in line with the lender’s Standard Variable Rate . The discounted interest rates attached to this type of home loan product are genuine and will normally apply for a set period of between one to five years. The discounted interest rate is designed to attract new customers.

Once the discount period expires the interest rate will convert to the lender’s SVR which can result in a sharp increase in the monthly mortgage payments due. This means that borrowers should take careful note of when the discount is due to expire and prepare to remortgage to a more suitable home loan product if required.

Also, because the discounted interest rate is a variable rate, any change in the lender’s SVR will affect the discount mortgage’s interest rate and the amount of monthly repayments due. The lender’s SVR will normally reflect changes to the Bank of Canada, although this is not a requirement. Therefore borrowers should also take note of any major changes in the base rate as it could affect their own mortgage payments.

Discount mortgages are popular with first-time-buyers who cannot afford high mortgage repayments during the early years of homeownership. Borrowers of discount mortgages will experience a reduction in their monthly mortgage payments during the discounted period when compared to borrowers who do not have a discounted rate attached to their mortgage products. This is one of the more obvious advantages of this type of home loan product.

Despite this advantage, there are several disadvantages to consider before applying for discount mortgages. The most prominent disadvantage to consider is that discount mortgages often come with stringent terms and conditions including long tie-in periods and costly early repayment charges. Therefore, if a borrower wishes to redeem their mortgage during the discount period, they may be forced to pay hefty penalties to the lender that may negate the effect of the discount received.

This can effectively lock the borrower in to remaining in their property for a set period of time if they cannot afford to pay the early repayment charges if they need to sell their home and redeem their mortgage. Lenders will not normally waive the fee for any reason so borrowers should therefore look beyond the discounted interest rate when assessing whether to apply for a discount mortgage.

As with all non-standard mortgage products, professional advice should be sought from an independent mortgage adviser before applying for a discount mortgage in order to receive impartial advice as to whether this type of home loan product is suitable for your particular needs. A discount mortgage may not be the most suitable product for your needs just because it has a low interest period for the first few years of the entire term of the product.

There are many other factors to consider when applying for a home loan and an independent mortgage adviser should be able to guide you towards selecting the right product for your needs.