Sunny Freeman, The Canadian Press TORONTO – Rising mortgage rates announced Monday signal the end of historically low home borrowing costs and present Canadian consumers with a dilemma: either stay flexible, hope for the best and ride out the next several months or lock in to long-term loans.

Three big banks raised their mortgage rates by more than half a point, effective Tuesday, and most industry watchers expect that’s just the beginning of future small jumps that will hike the the cost of home ownership the rest of this year.

For consumers nervous about the changes, the security of five-year, or longer, fixed loans may be the best option, says one mortgage expert.

‘If that (rising rates) causes you discomfort then perhaps a fixed rate’s where you want to be and if a fixed rate is where you want to be,” said Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.

“If you’re closing in the next six months, I suggest people do that quickly.”

The changes affect closed mortgages with terms of three, four and five years at RBC Royal Bank (TSX: RY.TO), Laurentian Bank (TSX: LB.TO), and TD Canada Trust (TSX: TD.TO). Rates for mid-term mortgages like these tend to reflect the banks’ borrowing costs on bond markets, where mortgage loans are financed.

Other banks are expected to follow suit.

The biggest increase announced Monday affects five-year mortgages. All three banks are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.

That means a homeowner taking on a mortgage of $250,000 at the new posted rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday’s hike, that mortgage would have cost $1489 a month, or $88 less.

Many people with decent credit history who are applying for mortgages can negotiate better than posted rates.

The Bank of Canada is expected to begin raising lending rates this summer as it moves to fight growing inflationary pressures in the economy. The bank has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy.

The latest increases reflect real-time market interest rates, which usually signal future central bank rate jumps months in advance.

Looking ahead, potential homebuyers entering the market also must consider rising rates when they decide to bid on a house. Is it better to wait until rising rates have cleared out some potential bidders or will a flurry of buyers and sellers spooked by the prospect of higher mortgage costs affect the supply-demand balance?

Historically, staying short-term and flexible has been the best strategy over the long term. But banks advise that locking in at still-attractive longer-term rates of five years and more is always a good bet for many consumers who want to ease their risk and sleep at night.

If the current bank prime rate of 2.25 per cent rises by 2.5 percentage points – an average increase during a rate-rising cycle – a homeowner with a variable mortgage should expect to pay about 30 per cent more on the monthly mortgage, says McLister.

Generally, long-term fixed rates rise by about half of the variable rate, he said.

While the fixed versus variable decision is specific to each individual, McLister said if prime rates spike by more than 2.5 percentage point, odds are good homeowners will save money in a five-year fixed rate mortgage.

Potential homebuyers should get their pre-approval applications in fast and expect delays in pre-approvals due to increased application volumes, he said. And homeowners with mortgages up for renewal would also be wise to lock in rates as far in advance as possible.

McLister said it’s difficult to tell if bank prime rates will rise by 2.5 points, but he added the banks have begun a cycle of rate increases and rates in the near and medium term will continue to rise before falling again.

‘They came down in the most recent rate cutting cycle by 4.25 (percentage points), so going up about half of that is definitely achievable,” he said.

McLister added that most economists expect a half to one point increase in banks’ prime rates by the end of this year.

But using recent history as a guide, its not likely rates will rise much higher than 2.5 points.

‘When the rates go up three (percentage points) or so they don’t stay there and go in a flat line. They go up and they go down.”

CIBC (TSX: CM.TO) chief economist Avery Shenfeld also said mortgage rates hikes are a trend consumers should expect to continue.

‘Once the Bank of Canada starts pushing up short-term interests rates, and even in anticipation of that, it tends to spill out across the rest of the curve.”

He predicts the Bank of Canada will gradually raise key lending rates this summer, resulting in an increase of 0.75 per cent to one per cent by the end of September.

That would raise the average prime rate at the banks from 2.25 per cent to three per cent, which could tack on three-quarters of a per cent to the rates of homeowners with floating mortgage rates, Shenfeld said.

‘Consumers are forewarned that when they look at borrowing today they have to factor in potentially higher costs,” he said.

‘Consumers have to be aware in taking on debt at historically low interest rates that down the road they will be higher and have to leave room for their ability to pay those higher rates.”

When the Bank of Canada lifts rates, part of its intention is to take the fire out of the most interest sensitive segments of the economy, including the housing market, which has seen a particularly strong recovery, Shenfeld said.

The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.

Shenfeld said the rate increase could help dampen the house price inflation seen over the past several months.

Gregory Klump, chief economist at the Canadian Real Estate Association, said even though mortgage rates are rising, they are still comparatively low.

‘Even with interest rates expected to rise over the second half of this year, it’s going to be a while before mortgage rates are basically neutral. Even with interest rates rising they’re still going to be stimulative, just not as much.”

‘We’re coming off emergency level rates, and clearly the emergency has passed.”

http://ca.news.finance.yahoo.com/s/29032010/2/biz-finance-big-banks-raise-mortgage-rates-sign-era-historically.html

http://www.cbc.ca/money/story/2010/03/29/mortgage-rates-up.html    

Other banks expected to follow suit

Last Updated: Monday, March 29, 2010 | 10:24 AM ET Comments44Recommend43

CBC News

Royal Bank and TD Canada Trust announced Monday they are increasing several mortgage rates by up to 6/10ths of a percentage point.

The biggest jump is attached to the popular five-year fixed closed rate, which moves from 5.25 per cent to 5.85 per cent at both banks. That’s the posted rate, which is routinely discounted by the big banks.

RBC’s new discounted rate for the five-year term also rises 6/10ths of a percentage point to 4.59 per cent. TD’s rises the same amount to 4.55 per cent.

Both banks also raised their three-year and four-year fixed closed rates. The posted three-year rate at Royal Bank climbs one-fifth of a percentage point to 4.35 per cent, while the posted rate at TD jumps 4/10ths of a point to 4.70 per cent.

The posted four-year rate at both banks jumps 4/10ths of a percentage point to 5.34 per cent.

Other banks are expected to follow suit. The new rates, effective Tuesday, represent the first hike in Canadian mortgage rates since last October.

Variable mortgage rates, which rise in tandem with the Bank of Canada’s key overnight lending rate, are unchanged. But they are likely to be heading up soon too.

Bank of Canada governor Mark Carney warned last week that inflation was higher than expected. That had some market watchers forecasting that the central bank could move to raise its key lending rate as early as June.

The key rate has been at a rock-bottom 0.25 per cent since April 2009 to help the economy recover.

Fixed-rate mortgage rates tend to move higher when long-term bond yields rise.

A survey released last week by RBC found almost two-thirds of respondents expected the cost of servicing a mortgage to rise this week.

Read more: http://www.cbc.ca/money/story/2010/03/29/mortgage-rates-up.html#ixzz0jZs0hdne

 By Sunny Freeman, The Canadian Press

TORONTO – 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.

With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.

Warren added that the incentive for builders to add new houses to the market should also fade as supply increases and prices cool.

The front-loaded activity in the first half of the year will also contribute to lower sales, prices and construction in 2011, she said.

Canada’s recovery continues to outpace developed countries around the world with housing prices in the fourth quarter up 19 per cent year over year. The strong performance has carried through into 2010, with sales in the first two months just slightly behind the near-record levels seen in late 2009.

Warren said that year-ago comparisons are amplified by the sharp drop in sales and prices at the end of 2008, but still represent a remarkable turnaround in a short time.

“We’re not seeing a lot of evidence of speculative activity, I think you’re just looking at a tight market, more buyers than sellers and people have to pay a premium in that environment,”she said.

She added that milder that usual temperatures across the country may have also put a bit of spring into a typically slow winter sales season.

Meanwhile, housing prices in countries including the U.K., Japan and the U.S. were still below year-earlier levels in the final quarter of 2009.

http://ca.news.finance.yahoo.com/s/23032010/2/biz-finance-canada-s-housing-boom-continues-outpace-recovery-developed.html

Jeremy Torobin

Ottawa — From Saturday’s Globe and Mail Published on Friday, Mar. 19, 2010 10:21PM EDT Last updated on Monday, Mar. 22, 2010 6:16AM EDT

The clock is ticking on Canada’s record-low borrowing costs, as inflation continues to move at a faster rate than the central bank had expected.

The hot reading on inflation issued by Statistics Canada Friday is raising expectations that the Bank of Canada could lift interest rates as early as June.

Economists, meanwhile, rushed to boost their growth forecasts as the country’s economic rebound gathers steam.

The inflation figures, along with a report that showed retailers are benefiting from higher prices, pushed the Canadian dollar well past 99 U.S. cents Friday morning, before it fell back to close at 98.39 U.S. cents.

Consumer prices climbed 1.6 per cent in February, a slower pace than the 1.9 per cent in the previous month, according to Statscan. But the core rate – which strips out volatile items such as fuel – rose to 2.1 per cent from 2 per cent.

The Bank of Canada is guided by the core rate. Policy makers hadn’t expected the core rate to reach the central bank’s 2-per-cent target until the third quarter of 2011.

That, coupled with an improving economy, means Bank of Canada Governor Mark Carney is likely to boost rock-bottom interest rates sooner rather than later, some economists say.

“We’re progressively leaving the recovery phase,” said Yanick Desnoyers, assistant chief economist at National Bank Financial in Montreal. Policy makers “are going to change their tone on the economy in April, and they’re going to move in June. The longer they wait, the more aggressive they’ll have to be.”

Mounting speculation that the central bank will begin boosting interest rates before the U.S. Federal Reserve moves has helped push the loonie close to parity with the U.S. currency.

Canada is on course to become the first in the Group of Seven – which also includes the United States, Great Britain, France, Germany, Japan and Italy – to raise borrowing costs since the global crisis. The U.S., in contrast, shows no signs of hiking rates any time soon. U.S. consumer prices last month failed to increase for the first time in almost a year, and producer prices dropped.

In Asia, however, inflation is roaring back as growth accelerates. India’s central bank surprised markets yesterday with a rate hike, calling a fight against inflation “imperative.” China, which the World Bank suggested this week should do more to keep a lid on a potential bubble in its property market, posted a 16-month high in its consumer price index last month.

Still, many economists said Canada’s core inflation numbers were skewed because of hotels in Vancouver that charged exorbitant rates during the Winter Olympics. In one case, a hotel that normally marketed itself as a discount option was charging $1,200 a night for a suite that sleeps six people, a steep markup from the usual maximum of about $280.

But Mr. Desnoyers noted that, assuming the “Olympic effect” temporarily added 0.2 percentage point to core inflation, a reversal of that boost would still leave the rate above the Bank of Canada’s 1.6 per cent projection for the first quarter.

“It’s going to be very hard to meet the Bank of Canada’s projected inflation path with the kind of numbers we’ve seen recently,” he said.

Retail sales, meanwhile, rose 0.7 per cent in January, Statscan said, largely because of a rush for home-improvement products before the federal government’s Home Renovation Tax Credit expired. In volume terms, overall sales were up just 0.1 per cent, which means the gains were driven by higher prices.

Mr. Carney pledged last April to keep the benchmark rate at 0.25 per cent through the middle of this year, or longer depending on the inflation outlook. He will update his inflation and growth forecasts during the week of April 20.

Increasingly, economists say if he doesn’t start tightening in June, then he’ll likely hike rates the following month.

Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, said Mr. Carney may be getting an “itchy trigger finger” but will likely wait until July, having said in a March 11 speech that borrowing costs staying where they are until the end of June would be “appropriate.”

Nonetheless, Mr. Shenfeld said CIBC is now raising its first-quarter growth forecast to “roughly 5 per cent” from 4.1 per cent. Bank of Montreal deputy chief economist Douglas Porter said Friday that his firm has lifted its forecast to 4.7 per cent from 3.7 per cent, “and that may not be the final word.” If they’re right, it would be the second straight three-month period with growth at or close to 5 per cent. That compares with the central bank’s estimate of 3.3 per cent for the final three months of 2009, and its prediction of 3.5 per cent for January through March.

There is an outside chance Mr. Carney could use a speech in Ottawa on March 24 to lay the groundwork for a rate hike on April 20, but virtually all analysts say the earliest he could possibly tighten would be at a June 1 decision, and most maintain that he’ll wait until his next opportunity on July 20.

Most economists say Canada’s central bank will lift rates in increments of no more than 0.25 of a percentage point and may stop after a few moves to re-evaluate. That’s how the Reserve Bank of Australia has proceeded since last fall, when it became the first major central bank to tighten as the dust started to settle on the crisis.

Scotia Capital’s Derek Holt, who has said for weeks that Mr. Carney could start raising rates as early as next month, predicts “non-emergency, but low” rates for years.

Mortgage rates and the bond market have a nice little marriage; 9+ times out of 10, when bond rates rocket higher, fixed mortgage rates move up too.

As seen in the chart below, 5-year fixed rates and bond yields track each other fairly closely over time. In fact, on a monthly basis going back to 1980, there’s been a 97% correlation between the two.

It’s not a perfect marriage though, as we’ve seen recently.

On March 9, mortgage rates and the bond market unexpectedly kicked their relationship to the curb. Yields went way up, and mortgage rates actually fell slightly.

Banks are behind this pleasant divergence. In a rush for market share, they’ve started ‘buying’ customers with, what some say, are “unsustainably low” mortgage rates. (See “Banks Wage War”)

Put another way, big banks are pricing 5-year fixed mortgages at unusually low spreads above bond yields.

This is a party for homeowners. You don’t find 5-year terms at 70-85 basis points above the GOC very often.

Hopefully this “unsustainable” trend can be sustained well into the future. But odds are, spreads will normalize after the spring (at least until the banks decide to ‘give away’ mortgages once again).

This is far from the first time that fixed rates have drifted apart from bond yields. From late 2007 to mid 2009, spreads were way out of whack. The credit crisis kept mortgage rates high while bond yields dropped to multi-decade lows.

Everything needs to be put into perspective though. Despite deviations from the norm, the norm isn’t dead yet.  In general, lenders still need to pay bond rates for mortgage money, and they still have similar costs as before.

So when yields go one way, and fixed mortgage rates go the other, remember they’re still married. They’re just temporarily separated.

___________________________________________________

Sidebar:  Speculating on long term rate direction is like flipping a coin. It’s almost certain you’ll be wrong as much as you’re right.

Yet, when you see a big move in yields, on a short-term basis, there’s usually predictive power there. 

This comes into play when you want to lock in a rate on a new mortgage.  If you see yields jump 1/4 point, for example, it’s usually worthwhile to move quickly and get a rate hold.  If you don’t, there’s a good chance you’ll pay a slightly higher rate. 

Paying a fraction of a percent more isn’t the world, but the extra interest does add up over five years.

Whenever we see yields move in big spurts, we write about it here. When you see these stories, it helps to remember:

• The short term isn’t the long term. If you read that rates may go up next week,” that’s a short term statement. Economic news could come out two weeks later and drive rates the other way.
• The relationship between bonds and mortgage rates isn’t perfect, and even short-term forecasts won’t always be accurate.

That said, over the long run you’ll be right far more than you’re wrong by assuming fixed rates will track bond yields.

James Pasternak, Financial Post 

It is a legal document that stretches about 30 pages and runs about 10,000 words. Its execution takes no more than a couple minutes and when the ink dries on the signature lines, more times than not it is never read and gets slipped into a file folder, largely forgotten.

But despite its casual handling, the residential mortgage agreement governs the largest debt of over 5 million Canadians and within its fine print are the provisions that can make or break a household’s financial future. There’s a lot at stake. At the beginning of 2004, Canadians held $517.7-billion in mortgages.

“I think most of the major bank representatives do a good job of explaining these provisions to their clients but I think most people zone out and don’t really listen. All they think about is getting a mortgage at 3.8% and ‘I want to get this done’,” says Len Rodness, Partner, of Toronto-based law firm Torkin Manes (www.torkinmanes.com)

But beyond the interest rate there are a wide range of options and clauses in the mortgage agreement that deserve scrutiny. In a competitive lending environment, shopping for the right mortgage can bring significant savings and peace of mind through the amortization period.

Take the case of Hamilton, Ont., couple Kathy Funke and Dan Perryman. When they were shopping for a home in 2003, the interest rate was the top priority. They also wanted flexible prepayment options and accelerated weekly mortgage payments. To leverage the competitive interest rate they received, they went with a variable rate mortgage. They paid off a $230,000 mortgage in 5 ½ years.

“The power in these things comes from people who know how to manage [the] various privileges. It has a huge [savings] effect on amortization….The ideal thing is to understand what your privileges are and then combine them to your advantage — to what you can afford to do; to fit your lifestyle and ability to pay,” says Jeff Atlin of Thornhill, Ont. based Abacus Mortgages Inc.

And privileges there are. You just have to shop for them.

Accelerated Payment Options: Getting the loan paid earlier

It just seemed like yesteryear when everyone was paying their mortgage on the 1st of every month. Now, in addition to the first of the month option, some of the more common options are accelerated weekly and biweekly or semi-monthly options.

These frequency options result in long term savings. For example if one selects the accelerated biweekly option one is making 26 payments in a year, the equivalent of two prepayments per year over the monthly option. When a $150,000 mortgage amortized over 25 years is paid under an accelerated bi-weekly option, the debt is retired in 21 years and the interest savings are around $18,000.

Toronto resident and electrician Karl Klos, 26, selected “weekly rapid” payments on a mortgage amortized over 35 years. The mortgage payments are made each week but he added the “rapid” option by increasing the amount paid. Mr. Klos says that the payment frequency will pay off his mortgage in 25 years instead of 35 years.

“I can’t understand why anybody would do monthly payments anymore now that the banks offer the ability to have weekly payments. It may be a cash flow situation. If you do a weekly mortgage payment it could save you a significant amount of money,” says real estate lawyer Len Rodness.

Restating mortgage agreement vows

It doesn’t take long after one signs a mortgage agreement to hear from a neighbour or friend that they received a better rate. So when you dig out the mortgage agreement see if there’s a clause that allows borrowers to renegotiate their agreement before the end of the term. The bank might use a model called “blend and extend.” For example, if one has a $100,000 mortgage at 6% mortgage with two years to go they might blend it with the current five year rate of 3.79%. So according to mortgage broker Atlin when they average out 2/5 of the mortgage at 6% and 3/5 are at 3.79%, the customer will get a new reduced rate of about 4.6%. But the borrower is tied to the bank for another 5 years.

Putting spare cash against the mortgage with no penalty

Almost all mortgage agreements have options for mortgage prepayment without penalty. Klos’s mortgage agreement allows prepayments of up to 15% of the annual balance. Most financial institutions provide prepayment options in the 10-20% range. Some lenders allow borrowers to make the prepayment any time during the year while other agreements restrict the prepayment to the anniversary date.

Also, some financial institutions allow customers to make multiple smaller prepayments during the year as long as they don’t exceed the annual limit. Funke and Perryman were able to retire their $230,000 mortgage in 5 ½ years primarily because of the prepayment provisions in their mortgage.

Coming up with more money for each payment

Some lenders will allow borrowers to increase the payments without penalty. Depending on the wording of the mortgage agreement the increased payments can range from around 15% to 100% of the current payment. So if one is paying $1,000 per month under the 15% rule, a borrower can raise it to $1,150 per month. Klos’s weekly rapid payment plan was based on him raising the weekly payments by 5%.

“Payment and amortization are a function of each other. Any time you raise the payments you shorten the amortization; any time you shorten the amortization you raise the payment,” says Mr. Atlin.

The mortgage prenuptial: Penalties for getting out of your mortgage

“A mortgage is a contract first and foremost. It is a contract between a borrower and the lender,” Atlin says. And if someone hasn’t felt that cold business approach during the course of their mortgage, they certainly will if they try to leave early. Most borrowers pay out their mortgages when they sell their house, win a lottery or are offered a better interest rate by another company. Until recent years, the standard penalty for breaking a mortgage agreement was three months of interest. Paying out a $200,000 mortgage could amount to a $2,500 penalty.

In many current mortgage agreements, the penalty for an early exit (and not extending) is either three months of interest or an interest differential, whichever is greatest.

The mortgage differential penalty can be quite expensive. If a mortgage is at 5% interest rate and you have three years left in your term, the bank will use the difference between the agreement rate and the current market rate to calculate the penalty. Using the 5% case above, let’s say the current 3-year mortgage is available at 3.5%. The bank will charge the difference between 5% and 3.5% for the balance of your term.

Bank customers who have an open mortgage with a variable rate can usually pay them out with little or no penalty. Some mortgages are closed for the first few years and then revert to an open option. The penalties, if there are any, would be much lower once the mortgage converts to an open one. If one can, it would be best to wait until the mortgage kicks into open status.

When paying out the mortgage try to have some of it calculated as your annual no-penalty prepayment option. Therefore, if you are paying out a $200,000 mortgage and you also have a 20% per annum prepayment option you might be able to save penalties on $40,000. If the mortgage prepayments can only be done on the anniversary date, make sure that is the day you select to pay out the mortgage.

Mortgage Lifelines

Mortgages are often signed and sealed with the borrower having every intention to pay. However, the world is paved with best intentions and recessions are everyone else’s problem until the boss comes into your office with the bad news.

“That is something that nobody turns their attention to at the time. The original document is done. The legal issues are in that original document. For a practical point of view given the state of the economy these [clauses] might be something beneficial,” said Len Rodness of Torkin Manes.

Some mortgages include a Rainy Day option. This option allows the borrower to skip one principal and interest payment each mortgage year. The interest portion of the skipped payment or payments will be added to the outstanding principal balance.
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/story.html?id=2631845#ixzz0iTZkol9e

By The Canadian Press    OTTAWA – The high Canadian dollar appears to be here to stay despite what the Bank of Canada or inflation do to impact the currency.

Economists say the loonie, which jumped past 99 cents US on Wednesday, could hit parity at any time.

And unlike two years ago when the currency fell off the parity perch against the U.S. greenback as quickly as it had climbed, this time there will be no sudden retreat.

Under normal circumstances, Friday’s inflation numbers should provide a downward draft to the loonie’s flight.

The consensus of economists is for inflation, which hit 1.9 per cent in January, to fall all the way back to 1.4 per cent in February’s data.

That won’t matter, however, says TD deputy chief economist Craig Alexander.

He says the markets have already priced in that inflation will be low going forward, as they have that the Bank of Canada will likely move well before the U.S. Federal Reserve in raising interests rates.

Whether the loonie is slightly below parity, at parity or a little above, Alexander says the key point is that Canadians should expect the currency to remain strong for some time.

Also pushing up the currency is the perception that Canada’s resources-based economy will continue to benefit from high oil and mineral prices.

Industry Minister Tony Clement said Canadian businesses are learning to live with the new reality.

“Obviously, historically it’s been an issue for Canada,” he said of the negative impact of a strong currency on industry.

“What we’re seeing,” he added, “is that Canadian manufacturers and other exporters are learning to live with the higher dollar.”

http://ca.news.finance.yahoo.com/s/17032010/2/biz-finance-high-canadian-dollar-stay-economists-say.html

Nicolas Van Praet, Financial Post  Montreal — The era of fearing Canada’s high-flying loonie might finally be passed.

Trading near US98.6¢, the dollar is now the closest it’s been to one-on-one status with the U.S. greenback since July 2008. And Jim Flaherty, Canada’s finance minister isn’t flinching.

“We see where it’s at now and it’s competitive,” Mr. Flaherty said of the currency’s impact on the Canada’s economy in an interview on Bloomberg Television. The economy could be at risk if the loonie rose to an uncompetitive level but that is not expected to happen, the minister said.

There was a time not so long ago when a loonie edging closer to parity with the U.S. dollar would trigger hoots of outrage from business leaders and federal opposition ranks alike, demanding the Canadian government do something to tame the bird or face ballooning welfare rolls and corporate bankruptcies. Just last summer, Mr. Flaherty himself expressed worry about the loonie’s quick rise.

But the country has now lived with a Canadian currency that’s stayed above US90¢ for much of the past year after hitting a high of US$1.10 in 2007. And today, that indignation may be over amid a raft of data suggesting Canada’s economy is surging back to life.

The S&P/TSX Composite Index on Tuesday rose to its highest level has since September 2008. Oil prices firmed up past US$81 a barrel. New government data showed labour productivity improvements blasted past expectations to 1.4% in the fourth quarter — the fastest rate in almost 12 years.

The governing Conservatives are also taking heart in this past Friday’s labour force survey, which showed Canadian employers hired more people than expected. Employment has been on an upward trend since July 2009 as 159,000 jobs have been added over the past eight months. The economy grew at an annual rate of 5% in the fourth quarter.

But another key element is what’s happening with manufacturers, who typically get hit when the Canadian dollar rises because the goods they sell outside the country become more expensive.

Fresh manufacturing figures Tuesday added to the evidence that Canadian companies are adjusting better than in the past to currency swings, as long as those swings aren’t gigantic. January manufacturing sales rose 2.4% to $44.6-billion, a fifth straight month of growth for a sector hit hard by weak demand during the recession.

“For manufacturers, this situation now is really like a bad remake of Groundhog Day. We’ve seen this before,” said Jeff Brownlee, spokesman for the Canadian Manufacturers and Exporters association. “What we’ve been saying to our members is that the new normal is the dollar at par or beyond. Par is not a ceiling. And if you can compete at par, and if the dollar doesn’t go there, you’re going to be making money.”

Examples abound of Canadian exporters which have reinvented themselves or stepped up their game to stay alive and win in the face of a higher dollar. Kitchener, Ont.-based Christie Digital Systems Canada, Inc. realized the televisions it was making could no longer compete with cheaper-made Korean and Chinese rivals. So it switched its vocation and now makes advanced video projection systems used at concerts around the world.

Others have taken less dramatic steps, protecting themselves with currency option contracts, retooling plants with new machinery, or engineering their operations to ensure U.S. denominated revenue was used to pay U.S. suppliers.

“Exporters to the U.S. have had fair warning and they’re tried to adjust to it. So maybe to some extent they’ve got used to it,” said Dale Orr, an independent economist. “They’ve lost a little bit of steam in terms of getting public sympathy or government sympathy, that’s for sure. It isn’t there like it was.”

Behind the latest numbers and the success stories however lies the stark fact that nothing dramatic has changed in the competitive fundamentals of Canadian companies over the past three years, warned Don Drummond, chief economist at TD Bank Financial group.

To take just one measure, although Canada’s private sector productivity soared in the fourth quarter, it was its first uptick in more than a year and it fell during the recession as the United States’ output per hour worked rose sharply. Productivity still trails that of our trading partner.

“Canadian businesses have not become more competitive this time around than they were the last time the dollar was reaching parity,” Mr. Drummond said. “There’s no tangible evidence looking at the productivity and the cost-effectiveness of the business sector to suggest that they’re in a better position this time around. In fact if anything, they’re worse.” 
Read more: http://www.financialpost.com/news-sectors/story.html?id=2690063#ixzz0iQxuJjCR

Sunny Freeman , The Canadian Press

TORONTO – Home prices will continue to rise this spring as buyers scramble to close deals ahead of expected higher interest rates, new mortgage rules and new taxes in two key markets.

A report by RBC Economics issued Monday found that the cost of owning a home in Canada increased slightly across all housing segments in the closing months of 2009.

Strong demand, fuelled by exceptionally low mortgage rates, has increased competition for the limited supply of homes for sale, which continues to drive prices up, the report said.

RBC senior economist Robert Hogue said the problem is likely to get worse with an anticipated rise in interest rates in the second half of the year.

The Bank of Canada has pledged to keep its key overnight rate at 0.25 per cent, where it has been since last spring, until the end of the second quarter. But economists anticipate it will begin rising as early as July.

Historically low interest rates have been cited among reasons for the strong housing market, with sales of existing homes moving higher again in February and setting monthly records in both Ontario and Quebec.

The Canadian Real Estate Association said 36,275 homes were sold across the country in February, up 44 per cent from the same month in 2009, when the recession was still impacting both consumer optimism and loan activity.

But February’s year-over-year gain was much smaller than in the previous three months, CREA said. Part of the reason was that February home sales were down in Vancouver as the Olympics impacted activity there even as sales in Toronto logged an equally large gain.

Overall, seasonally adjusted home sales were down 1.5 per cent in February compared with January.

Economists predict that real estate markets in B.C. and Ontario will remain hot in the months prior to the introduction of the harmonized sales tax in those provinces on July 1, which will increase the transaction costs associated with a home purchase.

Douglas Porter, deputy chief economist at BMO Capital Markets, said some buyers in Ontario and B.C., which combined account for over half of national sales, are advancing their purchases to avoid paying the HST.

“It’s no coincidence that Ontario and B.C. have seen the biggest gain in sales in the country,” he said.

CREA chief economist Gregory Klump said buyers in those provinces are driving national sales activity higher in the first part of the year.

“It should remain a tight market with negotiations favouring the seller in a number of major markets in the first half of this year,” he said.

Klump said that strong resale housing demand continues to draw down inventories, but softer sales activity and an increase in new listings in recent months has helped slow the depletion of available properties.

“Those sellers who moved to the sidelines at the depth of the recession will be putting their homes back on the market in response to headline average price increases,” he said. “

Porter said the increase in supply from ultra-low levels helps bring the market closer to balance, but that the still-tight market means prices will remain high.

“We’re going to get a very hot market in the next few months but it won’t overheat,” he said.

“I think we’ll get one more wave of relatively strong numbers over the spring and then we’ll crest and the market will come off the boil in the second half of the year.”

He added that Ottawa’s recent efforts to “release some steam from the market” will help slow activity, and “the housing market will pull up just short of bubble territory.”

Finance Minister Jim Flaherty announced new mortgage qualification rules last month to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road when rates return to more normal levels.

In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.

Porter said the changes will prompt those affected – primarily first-time buyers and investors – to buy in advance of the new rules, and bump up sales in March.

Still, other buyers could be hesitant to enter the frenzied market this spring and may tolerate a small spike in interest rates and wait for conditions to cool off, he said.

“Some cooler heads will decide they can get a better deal in the second half of the year even if it does come at a higher interest rate.”

A home may be one of the biggest investments you ever make. Saving up a down payment is just the first step. Find out more.

What factors affect the value of a home?

• Location: Real estate people always say “Location, location, location.” That’s because the area you live in will be the biggest factor affecting your home’s price. It’s smart to buy a home where housing prices are likely to increase. Also, the people who may buy your home from you one day may be willing to pay more for a home that is close to schools, sports centres, stores, services, and so on. Keep that in mind as you look.
• The condition of the home and the property it is on: Does the home need a lot of repairs? How is the roof, plumbing, and electrical wiring? A home in good repair may be worth more. Also, the condition of the outside of the home, the lawn, gardens, driveway, and trees will all affect the value of a home. These are the first things that buyers see, and are together known as curb appeal.
• Renovations and updates: An older home might need some work to keep it safe, modern, and comfortable. If you are buying at a home that has had some renovations, check the quality. When you do work on a home you own, do it as well as you can. Poor work can lower the value.
• The economy: There are some things you can’t control that affect house prices, like interest rates. Higher interest rates mean it costs more for a mortgage, so fewer people buy homes. When that happens, the prices of homes can fall. Lower interest rates, on the other hand, can boost buying and drive prices up. House prices often go up for a while, and then come down a bit. Try to find out as much as you can about how prices are changing, or may change, when deciding to buy or sell a home. Often there will be stories in the paper about housing prices.

How much is my home worth today?

If you’re considering buying a home, or you just bought one, you know how much it’s worth. But if you’ve owned your home for a while, its value has probably changed. Here’s how you can find out how much it’s worth now:

• Call a real estate agent: Ask them for an estimate of your home’s value. You may be able to get an agent to do this for free, because they hope to get your business in the future.
• Ask an appraiser: Your bank or a real estate agent should know a number of appraisers. Banks use them to estimate house values before they approve mortgages. You can also look in the yellow pages. An appraiser will charge a fee for the service.
• Check to see what other homes in your area have sold for recently: Compare your home with similar ones that have sold. Unless you keep up with what’s happening in your area, this information may be hard to get. Ask your real estate agent if you can’t find it yourself.

How much will my home be worth in the future?

To estimate a home’s future value, you will have to do some informed guessing. Start with finding out what has happened to prices in your location over several years.

Source: Canadian Real Estate Association (MLS®) http://www.theglobeandmail.com/globe-investor/investment-ideas/investor-education/understanding-house-prices/article658078/

Should I buy a home now, or wait and save more money?

Sometimes people can’t wait to buy a home because of family or personal reasons. For example, they may have a new baby coming and need more room. Or, they are worried about house prices going up faster than they can save.

What if you don’t have the down payment you need for the house of your dreams? Should you wait and save more, or find another way to borrow the money you need? You won’t be able to get a standard mortgage but you could get another type of loan.

Should I save more or borrow more?

Here is a summary of the reasons to buy now, or wait.

Have a great weekend!