Highlights from across Canada:

- British Columbia: Homeownership became even more expensive in B.C.,

as strong home price momentum continued in the first quarter. Housing

affordability measures have now returned close to the all-time highs

reached in early-2008. This trend represents a risk that could weigh

heavily on the province's housing market in the near term.

- Alberta: Affordability measures eased in the first quarter, as

Alberta was the only province to show a decline in the costs

associated with owning a home. Housing price increases in the

province were fairly modest over the past year, which has kept home

ownership relatively affordable. RBC affordability measures are at or

below the long-term averages.

- Saskatchewan: Housing prices picked up in the province in early 2010,

causing home affordability measures to rise significantly in the

first quarter. This is a change from previous quarters, which showed

an improvement in affordability. Despite this increase, affordability

measures still remain well below the all-time peak levels reached in

early-2008.

- Manitoba: Prices for most housing types surged ahead in the first

quarter of 2010, pushing affordability measures above the long-term

average for the province despite a slower pace of resale activity.

Affordability in the province has reached a point where an additional

decline in home affordability may temper housing demand.

- Quebec: Quebec's housing market rally continued in the first quarter

of the year, with record-levels of buying activity and rising

property values. This escalation in home prices, while more moderate

than in the previous two quarters, weakened affordability in the

province. All affordability measures now exceed their long-term

average, which may soon slow housing demand in the province.

- Atlantic Canada: Resale activity on the East Coast remained solid,

with an increase in sales met by a rise in the supply of available

homes. These broadly balanced conditions have limited the pace of

price increases in the region. Overall housing affordability in

Atlantic Canada continues to be among the most attractive in the

country, with measures still below long-term averages.

The full RBC Housing Affordability report is available online, at www.rbc.com/economics/market/pdf/house.pdf

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Home ownership gets more expensive, but not to pre-recession levels

SUNNY FREEMAN
May 25, 2010 6:22 p.m.

TORONTO - Canadians will find it more expensive to own a home this year and in 2011, as higher interest rates are expected to chip away at affordability even as the rise in home prices begins to subside, two of Canada's major banks predicted Tuesday.

A report by RBC Economics Research released Tuesday said affordability would deteriorate throughout 2010 and 2011 as rising interest rates increase mortgage and other loan payments.

"Some erosion in affordability is going to come from higher interest rates... (meanwhile) prices continue to rise. Combine the two and I think the second quarter you should expect some further deterioration in affordability," said RBC senior economist Robert Hogue.

Canada's hot housing market is coming back into balance between supply and demand following a seller-friendly period in which buyers competed for — and drove up the prices of — the few houses for sale during the first stages of economic recovery.

As demand cools and supplies increase, the pace of price increases will slow, but won't fall fast enough to offset rising interest and mortgage rates, Hogue said.

"I'd be hard-pressed to see any kind of the recent pace in price increases being maintained, but it might not be an outright decline any time very soon," he added.

The RBC report found home ownership costs in Canada rose across all housing segments in the first three months of 2010 — the third quarter of increases in a row.

With the exception of Alberta, home affordability measures deteriorated across all provinces with significant declines in affordability in British Columbia, Saskatchewan and Manitoba. Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada.

Meanwhile, a new report from the Canadian Real Estate Association found that Canadian home prices are unlikely to undergo the type of sharp correction seen south of the border, where prices plummeted and foreclosures ensued.

The CREA report says the current period of high home prices is a natural part of the demand-driven market cycle.

"The Canadian housing market is now widely thought to be at, or very near, the top of a cycle, and the ratio of home prices to incomes is currently high," said its chief economist Gregory Klump.

The CREA report said the income-to-house price ratio will soon revert to its long-term average as it always does as part of a normal housing market cycle.

"History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again," Klump said.

Unlike their U.S. counterparts, Canadian mortgage holders have borrowed conservatively and are accelerating mortgage repayment, which will give options to those who may face financial difficulties when they renew their mortgage at a higher rate, the report said.

A report on housing affordability by CIBC World Markets on Tuesday suggested about 1.5 million, or 17 per cent, of houses in Canada, are currently overvalued.

CIBC senior economist Benjamin estimated that, on average, Canadian home prices are now around 14 per cent over their "fair" value, adding there would likely be a five to ten per cent price correction in the next few years.

"This pace of appreciation has been quicker than justified by housing market fundamentals such as income, rent or demographic changes," Tal wrote in the report.

"While the booming housing market is starting to come back to earth, the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow," he added.

Tal's report found the average price of a house has risen by nearly 23 per cent since reaching recent cyclical lows in January 2009. And the erosion of affordability — as interest rates rise faster than prices drop — could cause problems for the most vulnerable segment of the population, he said.

CIBC's new home ownership affordability index found that home ownership is increasingly difficult for families with household incomes less than $50,000, who on average spend close to 60 per cent of their gross income on mortgage payments, property taxes and electricity costs.

The report found that Canadians today spend 15.6 per cent of their average gross personal income on mortgage payments, which is about the same as 10 years ago. When adding in electricity bills and property taxes, it rises to about 22 per cent of gross income.

Tal predicted that in the second quarter of the year, affordability will continue to deteriorate, even as prices level off. He added that home prices will fall in the second half of the year and in to 2011, which will improve affordability.

"I don't think affordability will be a major issue over the next two years. I think it will be relatively stable with interest rates rising, but prices actually going down a little bit," he said.

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JUNE 1 HIKE IN QUESTION

By Claire Sibonney Reuters

The negative news has led many to question whether Bank of Canada will start raising rates from their current record lows on June 1.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, have fallen in recent weeks and on Wednesday indicated just a 51 percent chance of a June 1 rate increase.

On April 20, when the bank removed its conditional pledge to keep interest rates on hold until the end of June, the market priced in more than a 90 percent likelihood.

Currencies tend to strengthen as interest rates rise as higher rates often attract capital flows.

"Even with the ongoing uncertainty, the Canadian situation warrants a small move toward more normal rates so I wouldn't unwind the forecast just yet," said Craig Wright, chief economist at Royal Bank of Canada., whose bank was the last primary dealer to join the call for a June 1 move.

"We're really just looking at a 25 basis point adjustment ... tapping of the brakes rather than slamming them on."

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Beware the coming credit card hit on Canadian families

Neil Reynolds Globe and Mail

Published on Wednesday, May. 19, 2010 6:00AM EDT Last updated on Wednesday, May. 19, 2010 1:49PM EDT

MBNA Canada Bank mailed notices to credit card holders last week, notifying them that the country’s No. 1 issuer of MasterCard will be changing the way it calculates minimum monthly payments. Other card companies are doing the same, in accordance with new federal regulations aimed at greater transparency for consumers.

As an example, MBNA cited an account balance that would have required a minimum payment of $185 in the past; as of August, that required payment will rise to $307, an increase of 66 per cent. A higher payment would reduce interest costs, MBNA noted, adding that it would also “help you pay off your balance faster.”

We now have detected yet another coughing canary in the exemplary Canadian coal mine. Exploiting low interest rates, Canadian households have taken on record personal debt ($1.4-trillion) – more than doubling it in the past decade to now equaling more than $40,000 for every man, woman and child in the country. This is the highest household debt in 20 of the most advanced economies of the Western democracies. More ominously, however inevitably, the number of Canadian households filing for bankruptcy (or taking alternative emergency measures) has also set a record. By year’s end 2009, more than 150,000 families were economic wrecks (up by 30,000 families from year’s end 2008).

Household debt includes mortgages, bank loans and credit cards. On the country’s huge increase in mortgage debt, the relevant experts are divided: On one hand, homeowners are apparently comfortable with it; on the other hand, Bank of Canada Governor Mark Carney not so much. As always, time will tell.

Credit card debt is another matter altogether. The number of credit cards written off as bad loans – on an industry-wide basis – fell marginally in April (from 6.9 per cent to 6.8 per cent). The optimism generated by this modest good news was, as Report on Business’s Andrew Willis noted last week, a factor in the Royal Bank of Canada’s off-loading of $1.2-billion in credit card debt to presumably astute investors.

But according to Deloitte Canada, in an April report, the credit card industry has averted calamity by the skin of its teeth. The industry, the accounting company said, “has been transformed from one of the most profitable areas of lending to one of the least.”

The industry’s narrow escape, Deloitte said, means that things will have to change – from strategic revision of business practices and operating models – to exits, by some companies, from the business. Deloitte attributed the crisis to a “perfect storm” of causes: “record net losses driven by increased debt and rising consumer bankruptcies, [which have] occurred at a time of increased government regulation.”

Canadians hold 72 million credit cards and 37 million debit cards. Credit card debt stands at $72-billion. How are card holders doing in making their minimum monthly payment? From year’s end 2008 through year’s end 2009, the number of delinquent credit card holders (with payments in arrears by 90 days) increased by 50 per cent. These tardy card holders won’t all default, of course; but, assuming that MBNA’s higher-payments strategy extends through the industry, more of them certainly would. On the margin – and millions of Canadians live close to it – people who have trouble with a payment of $185 will have more trouble with a payment of $307.

It isn’t only consumers with accumulated credit card debt who need to take note of credit card companies’ move away from the traditional easy-money approach to unsecured lending. Mr. Carney might take note, too. Higher monthly credit card payments are the economic equivalent of a broker’s higher margin requirements. It is an economic tightening that puts a brake on economic transactions. From Mr. Carney’s perspective, it’s another stubborn signal of deflation, because it’s inherently deflationary to curtail lending.

Banks make money in two ways: by charging fees and by collecting interest. In its letter to card holders, MBNA notes that the raising of the minimum monthly payment would decrease the amount of interest it collects. The maneuver is also defensive; in effect, it shifts the risk from itself to its customers.

There’s more of this sort of thing to come in the next few months. In July, Ontario and British Columbia introduce a wide range of (HST) tax increases that must be paid, at point of purchase, from people’s disposable personal incomes. Other provinces are raising a range of other taxes. As the conservative think tank Fraser Institute noted last month, the average Canadian household already pays more in taxes than it pays for food, clothing and housing combined. Alas, the Canadian household – or, at least, the Canadian private sector, working-class household – is pretty much a spent force.

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Housing market stabilizing: CMHC

Last Updated: Wednesday, May 19, 2010 | 11:37 AM ET

CBC News

New home construction in Calgary in March, 2010. After bottoming in 2009, new home construction is expected to increase in 2010. (CBC)

After bottoming during the recession, Canada's housing market rebounded through late 2009 and early 2010 but will stabilize over the next two years, the Canada Mortgage and Housing Corporation said Wednesday.

"Canadian housing markets have recovered from the low levels posted in early 2009," CMHC chief economist Bob Dugan said.

The moderation will be felt in new housing construction. Following a total of 149,081 units in 2009, housing starts are expected to be in the range of 166,900 to 199,600 units in 2010. The next year, the CMHC predicts housing starts will be in the range of 148,600 to 208,800 units.

"Moving forward, housing starts will moderate as activity becomes more in-line with long-term demographic fundamentals," Dugan said.

The existing home market will also stabilize, the agency predicts, as sales decline and inventories increase. Low mortgage rates and pent up demand combined to make real estate red hot for much of the past year, but the agency expects that pace to ease over the next two years.

Existing home sales will be in the range of 484,000 to 513,300 units in 2010, then move slightly lower in 2011 to be in the range of 443,500 to 504,900 units, the CMHC predicted Wednesday.

As for prices, the agency is calling for stability through 2010, followed by a modest rise in 2011.

The average price of a home in Canada hit $341,893 during the first quarter of 2010. The CMHC expects the average price to hover around $345,500 for 2010 before rising to $350,800 in 2011.

Read more: http://www.cbc.ca/money/story/2010/05/19/cmhc-housing-starts-2010.html?ref=rss#ixzz0oP5vZ3mT

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Fixed or float?

Combination mortgages increasing in popularity: RBC poll

TORONTO, May 17 /CNW/ - The popularity of combination mortgages - which offer both fixed and floating rate segments - is on the rise, according to RBC's 17th Annual Homeowners Survey. In fact, 40 per cent of Canadians who are likely to purchase a home within the next two years plan to take out a combination mortgage, compared to 32 per cent in 2009.

The surging popularity of combination mortgages indicates that Canadians are trying to maximize low interest rates while at the same time retaining the security of a fixed mortgage. The poll also revealed a marked gender split with more women (46 per cent) than men (35 per cent) preferring a combination mortgage.

"Although interest rates are expected to rise, our study shows that not all Canadians intend to automatically opt for a fixed mortgage with a longer term," said Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. "As consumers begin to learn about the benefits of mortgage diversification, we're seeing more homebuyers gain a better comfort level with adding floating rate mortgage options."

While combination mortgages are gaining in popularity, fixed-rate mortgages continue to be the most common choice for potential buyers and are preferred by 44 per cent of Canadians likely to buy a home within the next two years. Atlantic Canadians are most likely (54 per cent) to opt for a fixed rate, with Ontarians (41 per cent) least likely to do so.

"Many Canadians believe that a fixed-rate mortgage is the only way to have a locked-in and predictable payment, but a variable rate does not always mean variable payments," noted Moffat. "With our floating-rate mortgage, the portion of your payment that's applied to the principal changes, as interest rates change, not the actual payment itself. This means that when interest rates go up, your payment will pay off more interest; when interest rates go down, your payment will pay off more principal."

When current homeowners were asked about the impact of potential interest rate increases, 66 per cent said they were concerned, with women (70 per cent) more concerned than men (60 per cent).

"We expect the Bank of Canada to increase the overnight rate starting in June, with the pace of increases being fairly steady through the remainder of 2010 and 2011, which will continue to put upward pressure on borrowing costs," added Paul Ferley, assistant chief economist, RBC Economics.


Mortgage findings at-a-glance:

Fixed rate mortgages are preferred by:

- 44 per cent of Canadians likely to buy a home within the next two
years - down from 47 per cent in 2009

- 54 per cent of Atlantic Canadians (the highest in Canada)

Variable rate mortgages are preferred by:

- 16 per cent of Canadians likely to buy a home within the next two
years - down from 20 per cent in 2009

- 19 per cent of men compared with 12 per cent of women

Mortgage term most likely to be chosen by those opting for a fixed or
combination mortgage:

- Five-year term: 43 per cent

- More than five-year term: 29 per cent

- Three-year term: eight per cent

63 per cent: the proportion of Canadian homeowners who have mortgages
(compared to 56 per cent in 2005)

$124,131: the average amount remaining on Canadian homeowners' mortgages
(compared to $109,504 in 2005)

Lawlessbrown.com

With Statistics Like these, Now is the time to Re-arrange your finances!!!

Studies are proving that many Canadians have taken on more debt than they may be able to handle.

With the increase in current housing prices and mortgage rates at almost historical lows, now is the perfect time for home owners to take advantage of the current economic environment and re-arrange their finances, BEFORE interest rates start to climb.

Lowering consumer debt will not only decrease the amount of interest being paid on credit cards and lines of credits, it will drastically reduce monthly obligations. This will put homeowners in a much more stable and solid financial position moving forward and be able to face the increases in interest rates that are headed our way.

Talk to Krista and Sherri, your Accredited Mortgage Professionals, and see the benefits of using the equity in your home to save you money each month and be able to take the interest rate increases in stride.

Krista Lawless, AMP

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Even recession didn't slow down Canadian's spending, report finds

By Julian Beltrame, The Canadian Press

OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.

A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.

That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.

"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.

"The concern is do they understand the full cost of paying later?"

The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.

Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.

But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.

The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.

The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.

The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.

The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.

Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.

BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.

"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."

But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.

Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.

Dramatic Shift in Rate Hike Expectations

Ottawa -- The Greek crisis, together with Thursday's market chaos, has forced a "dramatic shift" in expectations of a Bank of Canada rate hike next month, a view reflected in a steep fall of the loonie on the belief that such increases are no longer in the offing as panic spreads about Europe.

Worries that the spillover in Greece may contract credit growth in Europe and threaten the global economic recovery rattled investors, with equity markets in North America sustaining deep losses and commodity prices falling.

And in a sign of concern reminiscent of the Lehman Brothers Holdings Inc. collapse, the London interbank offered rate - the cost of borrowing for banks from their peers - rose to its highest level since August, while the cost of protecting European bank debt against default surged to a 13-month high.

"Is Greece the canary in the coal mine that is going to lead to much greater economic troubles?" said Avery Shenfeld, chief economist at CIBC World Markets, in summarizing the top concern among market participants.

Markets were nervous from the onset after Jean-Claude Trichet, the European Central Bank president, suggested he was not prepared to take further measures to ensure the fiscal crisis didn't spread further.

Investors reacted by selling bonds in debt-laden European countries, with the yield on Portugal's 10-year notes surpassing the 6% level for the first time since the euro's introduction. Higher yields will make it increasingly difficult for countries such as Portugal, Spain and Italy to finance their debts.

It was only two weeks ago that traders had priced in a near 100% probability of a Bank of Canada rate increase in June after the central bank ditched its conditional pledge to keep its key policy rate low and suggested it was time to remove stimulus from the system.

Traders have now scaled back expectations by pricing in just a 50-50 chance of a pending rate, based on trading in the overnight index-swap market.

"The odds have dramatically shifted," said Mark Chandler, head of fixed-income and currency strategy at RBC Capital Markets.

That was evident in trading in the Canadian dollar, which fell as much as US4¢ in value before closing the day down US2.09¢ to US95.03¢. The dollar started the week in the US98¢ range. The currency's drop is attributed to a series of factors, including the Bank of Canada's appetite to raise rates.

Douglas Porter, deputy chief economist at BMO Capital Markets, said the potential fallout in Europe "has to be front and centre in the bank's decision. [The bank] would be much less willing to tighten if we are in the midst of a contagion fear that's sweeping through the markets."

Analysts say market volatility could prompt companies to delay decisions about investing and hiring workers until they figure out how events will unfold. Yesterday's activity on Bay and Wall streets provided no comfort.

Partly due to trading desk errors, the Dow Jones industrial average shed as much as 998 points before retracing losses and closing the session down 347.8 points, or 3.2%, to 10,520.32. The benchmark index in Toronto plunged as deep as 450 points, before rebounding to a 32.7-point loss, closing at 11,842.43.

All this unfolded even though Greece's parliament approved an austerity plan, which includes tax hikes and cuts to public-service perks and pay, demanded by the European Union and International Monetary Fund as a condition to secure a US$140-billion bailout. But concerns remain as to whether Greek legislators will implement the measures in the wake of the escalation of violent riots, which to date have claimed three lives.

In Ottawa yesterday, Finance Minister Jim Flaherty said Ottawa was "monitoring" the events in Europe. Meanwhile, officials with the U.S. Federal Reserve warned of repercussions to the U.S. economy if the feared contagion unfolds in Europe.

Financial Post,

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