By Sunny Freeman, The Canadian Press

TORONTO – Home sales rose in August on a monthly basis for the first time since March but prices remained flat — signs of health in Canada’s real estate market that should deflate fears of a housing bubble.

There were about 32,800 transactions in August, up 4.1 per cent from July on a seasonally adjusted basis, the Canadian Real Estate Association said in a report Wednesday.

However, the number of units sold was down 22 per cent from 42,350 units in August 2009.

“High sales activity late last year and earlier this year borrowed from sales this summer and will continue do so over the coming months,” Gregory Klump, CREA’s chief economist said in the report.

“This makes the return to more normal levels of sales activity look like a steep downward trend.”

Many potential buyers raced into the market while mortgage rates were at historic lows and before changes to mortgage qualification standards in April.

In addition, buyers in the hot housing markets of British Columbia and Ontario rushed to buy before the new harmonized sales tax, which applies to real estate services and some home purchases that had previously been exempt, took effect July 1.

In July, sales fell 30 per cent from the year before, when the strong housing market led Canada’s economy out of recession.

Sales have been falling steadily in recent months as demand moderates and more owners put their houses on the market. But until last month, home prices had continued to rise on a monthly basis, leading some economists to question whether the market could experience a sharp downturn.

The average price of homes sold through the Multiple Listing Service last month was $324,928, little changed from $324,843 in August 2009.

Douglas Porter, deputy chief economist at the Bank of Montreal (TSX: BMO.TO), said the flat year-over-year numbers suggest home prices have finally started to moderate in line with falling sales.

“Average home prices were officially unchanged from year-ago levels in August,” Porter wrote in a report, adding that “we still expect that average prices will post some modest year-on-year declines by the end of this year.”

Before the August numbers were announced, there had been some renewed debate amongst economists as to whether Canada’s housing market was teetering on the edge of a U.S.-style collapse as prices continued to rise even as sales fell.

That led some industry watchers to warn that home prices could be artificially inflated and might soon see a drastic downturn.

Klump said the hangover from accelerated home purchases earlier this year were likely to persist into 2011, but won’t push the market to the brink of crisis mode.

And Porter said a renewed slide in longer-term mortgage rates in recent weeks will help to offset a slow but steady increase in the Bank of Canada’s overnight interest rate, which climbed to one per cent last week, sending banks’ prime rates and variable rate mortgages higher.

“While home sales are still nursing a bit of a hangover from the real estate party in the first half of the year, it looks like conditions are stabilizing,” he said.

“Looking ahead, sales are expected to remain on the soggy side with consumer confidence dimming, but should find support in still-low rates and steady job growth.”

In another sign of housing market health, the number of new listings was more than double the number of sales, a clear indication the market is now considered balanced, Porter said.

As a result, it would take nearly seven months for all the listings to be sold at the current pace — a slight improvement from July but still relatively high.

Contrary to most economists’ expectations, did not signal a pause for its next decision in October

(Reuters)By Louise Egan

OTTAWA (Reuters) – The Bank of Canada raised its benchmark interest rate for a third consecutive time on Wednesday and sounded surprisingly hawkish despite predicting a more gradual than expected economic recovery.

The central bank nudged its overnight rate target up 25 basis points to 1 percent and, contrary to most economists’ expectations, did not signal a pause for its next decision in October. It said rates remained “exceptionally stimulative” but kept all options open due to doubts about the U.S. and global recoveries.

“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook,” it said in a statement.

The Canadian dollar jumped to a session high against the U.S. currency, touching C$1.0369 to the U.S. dollar, or 96.44 U.S. cents from C$1.0486 to the U.S. dollar just before the announcement.

Short-term money market rates and bond yields also jumped. The yield on the rate sensitive two-year Canadian government bond rose to 1.377 percent from 1.266 percent just before the news.

“Generally it’s a very upbeat statement, it’s a little more hawkish than I anticipated,” said Derek Burleton, Deputy Chief Economist at TD Bank Financial Group. “This will cast some uncertainty about whether the bank will pause at the next fixed announcement date.”

The Bank of Canada has raced ahead of its Group of Seven peers in raising borrowing costs after the global financial crisis. It lifted its policy rate on June 1 from an all-time low of 0.25 percent and raised rates again on July 20.

The U.S. Federal Reserve, by contrast, has raised the prospect of further easing and counterparts in Europe and Japan are likewise far from ready to tighten monetary policy.

CLOSE CALL

Markets had seen Wednesday’s rate hike as a close call because of rising fears of another U.S. economic downturn. Twenty-five out of 41 forecasters in a Reuters poll had predicted a hike. Most analysts also expected the bank to hold rates steady in October and December and possibly longer as it tracks developments elsewhere.

After the rate announcement, markets were pricing in an about a 68 percent probability the bank would leaves rates unchanged in October based on yields on overnight index swaps, according to a Reuters calculation.

“As it stands right now, our official call was for the Bank to remain on hold for the next few meetings, but that’s obviously something we have to review in light of the statement and as economic figures roll in the weeks ahead,” said Doug Porter, deputy chief economist at BMO Capital Markets.

The Bank of Canada said the 1 percent rate is “consistent with achieving the 2 percent inflation target in an environment of significant excess supply in Canada.”

The language was similar to that used in its last rate announcement on July 20. But the bank omitted any reference to weighing any further rate hikes “against domestic and global economic developments.”

U.S. TO BLAME

It acknowledged that the economic recovery was losing slightly more steam than it had anticipated just six weeks ago. Second quarter growth disappointed at a 2 percent annual rate versus the bank’s 3 percent projection. The bank will revise its official forecasts next month.

It blamed the weaker economy in the United States, which buys three-quarters of Canadian exports, for the tepid rebound in Canada. High U.S. unemployment is holding back spending by individuals and businesses, it said.

While exporters may take a beating, the bank sounded upbeat on domestic consumer spending and business investment.

“Going forward, consumption growth is expected to remain solid and business investment to rise strongly,” it said.

Most recent U.S. data have dampened fears of a double-dip recession but the recovery there is still wobbly, making it uncertain whether the U.S. Federal Reserve will see fit to take further action to drive down already rock-bottom borrowing costs.

The European Central Bank kept euro zone rates at a record low of 1 percent for the 16th month running last week and extended its program offering liquidity to banks.

The Bank of Japan stood pat on monetary policy on Tuesday but set the stage for possible easing next month.

Canada’s commodity exporting economy has been more akin to that of Australia, which hiked rates 150 basis points between October and May but has since moved to the sidelines. http://ca.news.finance.yahoo.com/s/08092010/6/finance-bank-canada-hikes-rates-sees-slower-recovery.html

Live in Studio with Bill Good we discussed why variable rates are so attractive right now, and how important it is to understand the factors of what has been holding some individuals back from taking advantage of todays record lows.

Click here to see the 9 minute segment 

http://www.youtube.com/watch?v=x8mtvKRpePo

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Hot off of the press of the Financial Post

Bank of Canada raises rates

Paul Vieira, Financial Post * Wednesday, Sept. 8, 2010

OTTAWA — The Bank of Canada raised its benchmark interest rate
Wednesday by 25 basis points to 1%, arguing financial conditions remain
“exceptionally stimulative” even in the face of a slowing — but still
growing — economy.

In its accompanying statement, the central bank acknowledged the
economic recovery in Canada would be “slightly more gradual” than
envisaged it its most-recent economic outlook, due to sluggish
private-sector demand in the United States. However, it said domestic
demand was expected to be “solid” and business investment to advance
“strongly” — powered by “accommodative” credit conditions that have
eased further in recent weeks due to sharp declines in bond yields.

Banks price loans, such as mortgages, based on yields for relatively
safe government debt.

The statement provided no suggestion the central bank was set to keep
rates on hold for an indefinite period, as some analysts now expect.

“As a result of monetary policy measures taken since April, financial
conditions in Canada have tightened modestly but remain exceptionally
stimulative,” the central bank said.

For instance, consumers continue to take out loans at a steady pace,
with central bank data suggesting household credit expanded at an
annualized 7.1% pace for the three-month period ended July 31.

The Bank of Canada said future hikes in its key lending rate, up 75
basis points in the past three months, “would need to be carefully
considered in light of the unusual uncertainty surrounding the outlook.”

This decision may come as a bit of a surprise for traders, who have been
largely divided as to which way Mark Carney, the central bank governor,
and his colleagues would lean toward in the face of slower than
anticipated economic growth. Markets had priced in a roughly 60% chance
of a rate hike, and those odds increased over the past week from a less
than 50-50 chance based on better-than-expected manufacturing and labour
data in the United States.

Canadian GDP expanded 2% annualized in the second quarter, well below
the central bank’s forecast of 3%. However, analysts have said the
economy was stronger than the headline print indicated, as final
domestic demand advanced at a robust pace (3.5%). Plus, much of the drag
in the second-quarter was from so-called “import leakage,” in which
gains in imports — as firms acquired productivity-enhancing equipment
at the fastest pace since 2005 — outstripped exports.

Of the GDP results, the Bank of Canada said economic activity “was
slightly softer” than expected, “although consumption and investment
have evolved largely as anticipated.”

The central bank is likely pleased at the turnaround in business
investment, which it has argued is required for the recovery to maintain
momentum once consumer spending tapers off. Plus, investment from firms
in productivity-enhancing technology is required to ensure future
growth.

The bank said the Canadian recovery would be “slightly more gradual than
it had projected in July … largely reflecting a weak profile for U.S.
activity.” The U.S. Federal Reserve has said it was prepared to take
further action if required to stoke the recovery, although officials at
the powerful central bank are unsure such measures are required.

The Bank of Canada said inflation — which the central bank aims through
rate decisions to hit and maintain a 2% level — has been “broadly in
line” with expectations and “its dynamics are essentially unchanged.”

In terms of the global picture, it said the recovery is proceeding “but
remains uneven, balancing strong activity in emerging market economies
with weak growth in some advanced countries.” As for the United States,
the world’s biggest economy and Canada’s biggest trading partner, the
central bank said the recovery in private demand is “being held back by
high unemployment and recent indicators suggest a more muted recovery in
the near term.”

Economists have scaled back growth expectations for both Canada and the
United States, although at the same time boosting the forecast for
Europe as its major economies are advancing better than expected
following the sovereign debt crisis in the spring.

The central bank is scheduled to provide an updated economic outlook
next month, two days following its next rate decision on Oct. 19.
Previously, the central bank had forecast 3.5% economic growth this
year, followed by 2.9% expansion in 2011. The output gap — a rough
measure of the amount of excess capacity in the economy — is expected
to close by the end of 2011.

For Immediate Realease:

Bank of Canada increases overnight rate target to 1 per cent

OTTAWA –The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies. In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term.

Economic activity in Canada was slightly softer in the second quarter than the Bank had expected, although consumption and investment have evolved largely as anticipated.  Going forward, consumption growth is expected to remain solid and business investment to rise strongly. Both are being supported by accommodative credit conditions, which have eased in recent weeks mainly owing to sharp declines in global bond yields.

The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity. Inflation in Canada has been broadly in line with the Bank’s expectations and its dynamics are essentially unchanged.

Against this backdrop, the Bank decided to increase its target for the overnight rate to 1 per cent. As a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative. This is consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada.

Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.

Information note:
The next scheduled date for announcing the overnight rate target is 19 October 2010. A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 20 October 2010.