The Bank of Canada kept its benchmark lending rate at 0.25 per cent Tuesday, reiterating its conditional commitment to hold rates steady until the middle of 2010.

Although it held the overnight lending rate steady, the bank did acknowledge that the recovery appears to be proceeding at a better pace than it was anticipating.

“While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected in its October monetary policy report, the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems,” the bank said in announcing the rate decision.

The Canadian economy grew by a tepid 0.1 per cent in the third quarter, Statistics Canada reported last month. But that “is expected to have picked up further in the fourth quarter,” the bank said.

The Bank projects that the economy will grow by 2.9 per cent in 2010 and 3.5 per cent in 2011, after contracting by 2.5 per cent in 2009.

In its statement, the bank repeated its mild concern over the risk that the elevated Canadian dollar presents to the recovery.

“The persistent strength of the Canadian dollar … continues to act as a significant drag on economic activity in Canada,” the bank said.

The bank is set to release its next decision on interest rates on March 2.

Rates to stay steady

“The bank remains committed to the conditional commitment to keep rates steady and low until mid-year,” said BMO Capital Markets deputy chief economist Doug Porter.

“Our view is that the bank then starts gradually lifting rates immediately thereafter, and there’s little here to sway that outlook. The recovery continues, but it will remain sub-par and still depends on a lot of stimulus.”

The bank also acknowledged that core inflation — excluding more volatile food and energy prices — was “higher than expected in recent months.”

In a commentary, ATB Financial economist Dan Sumner said: “The closer we get to the all important third quarter rate announcements there will be more pressure on the BOC to provide guidance on the speed with which interest rates will be brought higher.”

Jan. 18 (Bloomberg) — The Bank of Canada will probably keep its benchmark interest rate at a record low tomorrow and repeat a pledge to leave it unchanged through June.

The target rate for overnight loans between commercial banks will remain at 0.25 percent, where it’s been since April, according to all 26 economists surveyed by Bloomberg. The decision will be announced tomorrow at 9 a.m. New York time.

Governor Mark Carney has said Canada’s economy will operate with “slack” through the middle of 2011 as exports are curbed by the Canadian dollar’s 21 percent gain against its U.S. counterpart in the past year. Inflation slower than the central bank’s 2 percent target means Carney is unlikely to break his pledge to freeze rates until the second half of the year.

“The Bank of Canada has a bit of room to keep policy rates low over the next several months,” said Tom Nakamura, a fixed- income portfolio manager for AGF Investments Inc. in Toronto, who helps oversee about C$6 billion ($5.83 billion). “Economic activity we have seen so far is positive, but not enough to change the bank’s forecast for growth and inflation.”

Investors expect no rate increase until September, yields on overnight index swaps indicate. The yield on the contract due in September traded at 0.36 percent at 12:39 p.m. Toronto time, and the October contract traded at 0.40 percent.

Consumer spending led by home purchases will lead a recovery, allowing Carney to raise rates in the third quarter, said Meny Grauman, a senior economist at Canadian Imperial Bank of Commerce in Toronto.

‘Keep Commitment’

“They would like to keep that commitment and there’s no reason why they shouldn’t be able to,” Grauman said.

Carney will probably raise the key rate to 0.75 percent in the third quarter and to 1.5 percent by the end of the year, according economists surveyed by Bloomberg News. A separate survey for the U.S. shows economists don’t expect the Federal Reserve to raise its benchmark rate to 0.75 percent until the fourth quarter.

Low mortgage rates helped push existing home sales to a record in December, the Canadian Real Estate Association said Jan. 15. The average five-year mortgage rate was 5.49 percent last week and 5.25 percent in May, the lowest since 1951.

A 19 percent jump in home prices over the past year hasn’t pushed the inflation rate above the central bank’s target. Consumer prices rose 1 percent in November, Statistics Canada said Dec. 17. The so-called core rate, which excludes gasoline and seven other volatile items, slowed to 1.5 percent.

‘Cold Water’

Bank of Canada Adviser David Wolf said in a speech last week it’s “premature” to conclude there’s a bubble in the housing market, and a rate increase to slow it would “be dousing the entire Canadian economy with cold water, just as it emerges from recession.”

Canada “dug quite a hole” and the recovery “is not that solid,” said Dale Orr, head of Dale Orr Economic Insight in Toronto, in a telephone interview.

The strong currency and weak U.S. demand for the country’s cars and lumber will limit economic growth to 3 percent this year after last year’s 2.4 percent contraction, the central bank said in October. The bank will issue an updated detailed forecast on Jan. 21.

The Canadian currency appreciated 0.4 percent to C$1.0251 per U.S. dollar today, from C$1.0291 on Jan. 15. One Canadian dollar buys 97.5 U.S. cents. In October, the central bank raised its assumption for where the currency will trade through 2011 to 96 U.S. cents from the 87 U.S. cents it had assumed in July.

Restrained Spending

Consumer spending will be restrained because of job losses in provinces such as Alberta and Ontario, said Jeremy Reitman, president of Reitmans Ltd., a chain of women’s clothing stores.

Cautious spending by Canadians “is going to persist” this year, Reitman said in an interview from Montreal. “We are still very price conscious in Canada due to the lack of disposable income.”

The country lost 239,700 jobs last year, the first decline since 1992, and 323,400 jobs since employment peaked in October 2008. Prime Minister Stephen Harper this month said that restoring job growth will be one of his main challenges.

Canadian companies surveyed by the Bank of Canada expect the recovery to be gradual, the central bank reported Jan. 11. They also reported near-record optimism about future sales growth and continued easing of credit conditions.

TORONTO — Record home sales last month are based on low supply and high demand and are more likely to drop off this year than inflate a housing bubble that could threaten a fragile recovery, economists say.

A Canadian Real Estate Association report released Friday said December and the 2009 fourth quarter were the best periods on record for home resales, while prices also rose sharply from their year-earlier levels.

Meanwhile, strong demand continued to deplete the number of homes for sale and the estimated 5.6 months it would take to sell a house through the Multiple Listing Service in December was less than half the 12.3 months it would have taken a year earlier.

The number of total listings fell 22 per cent in December from the same 2008 period and 12.6 per cent for the year.

The imbalance in supply and demand drove the national average price of homes to $337,410 in December, 19 per cent higher than in December 2008, but slightly lower than the 2009 average of $348,840.

Douglas Porter, deputy chief economist at BMO Capital Markets said while high prices caused by strong demand and weak supply could pose a risk to the fragile recovery, he is not willing to jump on the “bubble bandwagon” yet.

A bubble occurs when prices increase without any sound underlying fundamentals, he explained, and that’s not the case in Canada’s housing market, which is closely tied to changing interest rates and economic fundamentals.

“We still do have a relatively tight supply situation and exceptionally low interest rates and a mild recovery in the economy, so there are a lot of good reasons why home prices are rising.”

“What we’re seeing is almost textbook recovery,” he said. “The speed of the recovery is mind-boggling, the fact that housing is leading the recovery is really not a surprise… it’s exactly what you’d expect to happen.”

Finance Minister Jim Flaherty said Friday he does not see a housing bubble yet, but he noted the government has many tools at its disposal — from raising down payment requirements on insured mortgages, to lowering amortization periods and urging the banks to be more cautious in their lending — to prevent such a thing from happening.

“We don’t want to have a group of house purchasers who purchased houses now at insured mortgages at relatively low rates who would not be able to manage them if rates were to increase later on,” Flaherty said in an interview with Business News Network, a cable TV business channel in Toronto.

“I’ve looked at the numbers with CMHC,” he added. “We’re monitoring it. I do not see evidence of a bubble right now, but we’re going to keep watching it. There are some steps we can take that we will take if it’s necessary.”

The association said 27,744 units were sold across Canada in December, up 72 per cent from the same month in 2008. The year-earlier period saw the lowest sales in a decade in the wake of a global credit crunch and the start of the recession in Canada.

The Kitchener-Waterloo Real Estate Board set a record in December with 356 sales. The Real Estate Board of Cambridge recorded 150 sales, up 60 per cent from the same month a year earlier.

December also marked the end of the strongest quarterly sales volume ever measured by CREA, with 137,957 homes sold over three months on a seasonally adjusted basis — up 2.6 per cent from the previous record set in the first quarter of 2007.

“CREA’s latest statistics will no doubt spark further bubble talk amongst the usual suspects,” said the association’s chief economist Gregory Klump. “(But) cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer.”

The 59 per cent year-over-year fourth quarter gain drove last year’s annual sales volume above 2008 levels, but the number of transactions last year was 10.7 per cent below the peak reached in 2007.

“The extraordinary decline in activity one year ago and subsequent rebound, particularly for higher-priced real estate, is stretching current year-over-year comparisons,” said Klump.

Klump believes the market will balance out in 2010 because consumer demand will be met with a supply side rise as the number of new homes increases and cautious homeowners become confident about selling, which will add more homes on the market and help drive prices down.

Porter said Friday’s report signals that Canadians have regained their confidence in the economy and the surge in demand is beginning to be met with a serious supply response, citing a notable uptick in December housing starts.

“Builders had been very cautious and they’re only now starting to crank up their output again, but even so, the comeback in new housing starts has been much more modest than the rebound we’ve seen in sales,” he said. “And people who own homes have also been a little reluctant to put their house up for sale because of the broader uncertainty that we’ve seen.”

He said that the demand in housing was most pronounced in B.C. and Ontario, where home buyers might be hoping to beat the introduction of the HST, the harmonized sales tax which is set to replace provincial taxes in those provinces later this year.

The Bank of Canada indicated last week that it was premature to be talking about a housing bubble in Canada and said recent house price increases are in line with supply and demand fundamentals.

The bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.

A CIBC forecast released Thursday indicated that the hot housing market will continue to drive economic growth during the first half of 2010, but will come to a screeching halt in the second half of the year, when interest rates are expected to rise.

OTTAWA — Canada believes time is running out for meaningful reforms to the world financial system to avert future economic meltdowns and will push for movement on the issue at next month’s G7 finance ministers meeting in Iqaluit.

Canadian officials briefing reporters on what is likely to be the most unusual G7 meeting ever say signs of hubris are again apparent among many of the global financiers blamed for plunging the world into recession.

Finance Minister Jim Flaherty is hoping that holding the meeting in isolated Iqaluit in the middle of winter will concentrate minds and lead to a renewed commitment to implement reforms.

The officials, speaking on background, said Monday that Flaherty is concerned that the momentum for reform of the world’s financial and banking sectors is waning as the economic crisis recedes.

The United Kingdom has imposed a punitive tax on executive bonuses, and the United States is also proposing to tax its largest banks. But system reform, such as ensuring risk is properly assessed, still remains to be implemented.

Canada believes the G7 countries have the primary responsibility for ensuring abuses are not repeated since the crisis originated within the world’s leading economies, the officials said.

The Iqaluit meeting in early February will be the first since the larger Group of 20 forum was declared the pre-eminent body for dealing with the world’s economic and financial problems.

And it will be unusual not just for its location, but also for its form.

Unlike past meetings, there will be no final communique issued of policies adopted in principle by the ministers and central bank governors.

By making the meetings more informal, the officials say Flaherty hopes they will be more frank and useful and prove that the G7 club is worth preserving.

One official said the necessity of producing a communique, or final concluding text, tends to concentrate discussions along producing unanimity. Freed of the need to produce a text, ministers and governors can engage in a more freewheeling, frank and political discussion.

One of those discussions will actually be held by a roaring fire, the official said.

The future of the G7, whether it will remain as a separate institution or becomes a subgrouping of the larger G20, remains up in the air and will be an issue before the ministers and governors in Iqaluit.

One reason it’s important to Canada that the G7 remain an influential institution is that collapsing the group into the larger G20 dilutes the country’s influence at the top table.

The officials say the Feb. 5-6 meeting in Iqaluit will tackle the gamut of issues dealing with the global economy, including ensuring the recovery is sustainable, exit strategies from government stimulus spending, global imbalances, currency exchange rates and trade.

One agenda item was added in the past week — Haiti — since the G7 countries are the biggest donors to the earthquake-devastated nation’s relief effort.

Flaherty has indicated that with relief efforts underway, the G7 meeting would be an ideal time to begin exploring how countries can help Haiti reconstruct and recover from the disaster.

The meeting’s unusual location, above the treeline in the middle of winter, has also necessitated contingency plans in case of inclement weather.

Should Iqaluit become inaccessible from air for the Feb. 5-6 meeting, the conference will be switched to Ottawa, officials said.

By Joe McDonald 

BEIJING — China took new steps Tuesday to control bank lending, ordering institutions to set aside more reserves in a move to avert a surge in credit that Beijing worries might fuel inflation or asset price bubbles.

China’s nascent rebound from the global crisis was fuelled by a flood of lending by state-owned banks last year. Bankers cut lending under government orders toward the end of 2009 but regulators worry credit might rebound this year.

The move indicates Beijing is confident growth can be sustained and has shifted focus to preventing financial excesses and economic overheating. The government is forecasting growth of 8.3 per cent for 2009, up from a low of 6.1 per cent for the first quarter of the year.

The central bank raised the amount of reserves that banks must hold by 0.5 per cent to 15 per cent of their deposits. Also Tuesday, the bank raised interest rates paid on one-year bills for the first time since August to absorb money from the market and cool credit growth.

“This series of moves by the central bank provides a clear sign that policy-makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles,” said Jing Ulrich, chair of China equities for J.P. Morgan, in a report.

Chinese stock and real estate prices soared last year, driven in part by stimulus money being diverted to speculation. The central bank governor and others have called for measures to prevent a dangerous boom and bust in asset prices, warning that could hurt the economy and banks that are left with unpaid loans.

Beijing also is trying to curb an inflow of foreign “hot money” that is coming into China to speculate in stocks and real estate.

Chinese banks lent 8.95 trillion yuan ($1.3 trillion) in January-October, up from a total of 4.2 trillion yuan for all of 2008. Much of that was in the first half of the year and lending fell sharply after July, when regulators tightened regulations on loans to buy second homes and ordered banks to scrutinize borrowers more closely.

The recent measures appear to be aimed at preventing a return to the torrid lending of early 2009. Despite the lending curbs, Chinese leaders have repeatedly assured the public that stimulus spending would continue in 2010. They say the government will pay special attention to entrepreneurs who missed out on aid in the first year of the stimulus.

The spending has sent housing prices soaring in Beijing and Shanghai since late 2008. Prices have roughly doubled over the past three years to more than 12,000 yuan ($1,700) per square meter, according to a December report by the U.S. bond manager Pimco.

Neighbouring Russia is suffering from the opposite problem.

Lending there is weak because banks are afraid of incurring bad loans, the chair of its central bank, Sergei Ignatyev, told parliament last month. He said corporate lending is flat, and retail lending is declining.

The politically sensitive prices of food and consumer goods also are edging up. After nine months of decline, consumer prices rose 0.6 per cent in November from a year earlier.

The bank reserve rate now stands at 15 per cent, its highest level since Dec. 5, according to the Chinese financial data website Hexun.com.

Rural credit cooperatives were exempt from the increase to make sure they can lend enough for spring planting, the central bank said. Their reserve rate was left at 13.5 per cent, according to Hexun.com.

The boost in the interest rate on the one-year bill was the first since August. The central bank had raised the rate for its three-month bills on Thursday.

The increase in the reserve rate was announced after Chinese stock markets closed.

The country’s benchmark Shanghai Composite Index closed up 1.9 per cent, or 61.22 points, at 3,273.97 on Tuesday. The index was one of the world’s best performers in 2009, ending the year up 80 per cent after heavy stimulus spending.

Investors are sensitive to changes in credit that they depend on to finance speculation and previous lending curbs have caused stock prices to fall.

The Associated Press

Canada falls back into trade deficit as dollar, low demand stalls exports

Julian Beltrame, THE CANADIAN PRESS
The Canadian Press, 2010

OTTAWA – Canada was pulled back into a trade deficit in November as the country faced twin headwinds of both a strong loonie and weaker demand for exports, after a surprisingly strong performance the previous month.

The value of exports from Canada rose 1.1 per cent from October, but imports jumped 3.9 per cent, producing a deficit of $344 million. In October, saw Canada posted its first trade surplus in months at $503 million.

In terms of volume, exports fell a disappointing 0.1 per cent in November, Statistics Canada reported.

Economists say with the loonie worth nearly as much as the American dollar, and potentially reaching parity within the year, the prospects for 2010 remain bleak for Canadian exporters.

“Don’t look for a quick return to the halcyon days of big surpluses any time soon with domestic demand reviving faster than U.S. spending, and the Canadian dollar remaining lofty,” BMO Capital Markets economist Douglas Porter wrote in an analysis of the trade data.

On Monday, Prime Minister Stephen Harper blamed soft international demand and the strong loonie for the weakness in Canada’s manufacturing sector and slow jobs recovery.

But Export Development Canada offered some modest hope Tuesday, saying its semi-annual trade confidence index rose to 77.4 in the fall of 2009 from 68.5 during the spring.

“Trade is definitely in a growth mode, but we can’t forget the starting point,” said EDC chief economist Peter Hall. “Canadian exports took a 20 per cent hit in 2009, six times greater than any annual decline in recent memory. What exporters are saying is that they expect to start climbing out of that chasm.”

And Hall believes exporters will be getting a break from the currency in the latter half of this year, although many other analysts see the loonie remaining near or above par with the U.S. dollar for most of 2010.

“We think the drivers of the currency are out of whack with reality,” Hall explained. “Base metal prices seem a little too high and oil prices now are more indicative of an economy that is fully recovered than it actually is.” Hall says he believes the Canadian dollar will slump to about 86 cents US in the second half of 2010, about 10 cents US lower than its current level.

Still, economists are not looking for a quick turnaround in Canada’s trade performance.

TD Bank economist Dina Petramala said although goods exports are on track to record a 12 per cent annualized gain in the fourth quarter of 2009, she still expects Canada to stay in a trade deficit for most of this year.

She said weak U.S. demand for Canadian exports and the high dollar points to another year of struggle for the export sector. About 75 per cent of Canada’s exports head to the U.S.

As well, a strong dollar has the effect of making imports more attractive to Canadians, further exacerbating the trade deficit.

In November, exports increased to $31.6 billion benefiting on the higher price of oil – the fifth increase in six months – as prices rose 1.1 per cent.

But in volume terms, exports actually slipped 0.1 per cent. And excluding energy products, exports fell 0.3 per cent.

Meanwhile, imports to Canada increased by $1.2 billion to $31.9 billion, almost offsetting the declines of the previous three months.

Most import sectors posted gains, with automotive products, machinery and equipment, and energy products accounting for the bulk of November’s increase.

The exception was industrial goods and materials.

Exports to the United States rose two per cent while imports, which increased 3.8 per cent, accounted for almost two-thirds of the gain in overall imports.

As a result, Canada’s trade surplus with the United States narrowed to $3.2 billion in November from $3.5 billion in October.

Exports to countries other than the United States fell 1.2 per cent while imports from these countries increased four per cent.

Consequently, Canada’s trade deficit with countries other than the United States widened to $3.6 billion in November from $3 billion in October.

Response to the Strata Property Act Amendments Concerning Rentals Announcement     January 12, 2010    

Good morning,

We have had several questions to our recent email regarding the recent changes to the Strata Property Act and rental units.  Below is a summary of the questions and our answers.

What is a “RDS”?  

“RDS” is the Rental Disclosure Statement that is filed as part of the Disclosure Statement. Developers are required to provide a Disclosure Statement every time they sell 5 or more units, and a Rental Disclosure Statement is part of the Disclosure Statement.

How does this affect a buyer acquiring property already tenanted from original owner – It does not.  The recent changes to the Strata Property Act only apply to Disclosure Statements filed after Dec. 31, 2009.  There is no change for units in which the Disclosure Statement was filed prior to that time.

Does this mean that any new strata filed after January 1^st of 2010, does not have the power to enforce rental restrictions?  This is correct only if the Rental Disclosure Statement reserves the right to rent for a period of time (which most do).  Developers may choose to file a RDS that prohibits rentals and in such a case, rentals shall not be allowed.

Does this apply only to No Rental restrictions or what about where strata set up a maximum number of units to be rented?  As stated above, the changes have nothing to do with existing units, so current No Rental Restrictions are in effect and remain so.

Most every form ‘B’ I have seen says nothing about a date?  It is the Rental Disclosure Statement that is relevant, not the Form B.

If you have anymore questions please let me know, 

 Tune into The Mortgage Show on CKNW AM980 Saturdays at 7pm with AMP of the year Angela Calla

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January 2010   Angela Calla Dominion Lending Centres Phone: (604) 802-3983 Cell: Fax: E-mail Website   DID YOU KNOW… I can help protect your home and family through a mortgage life insurance policy. Mortgage life insurance is a life insurance policy on a homeowner, which will allow your family or dependents to pay off the mortgage on the home should something tragic happen to you. This is not to be confused with mortgage default insurance, which lenders require to cover their own assets if you have less than 20% equity in your home. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself. HOMEOWNER TIPS Humidifier Maintenance: Whether you have a power humidifier or just a simple pan-type model, you will have to clean your humidifier on a regular basis to ensure proper operation. As water evaporates, it leaves behind mineral deposits that clog the mechanisms in the humidifier, eventually causing it to stop working. You will be able to tell when cleaning is appropriate as the mineral deposits will be noticeable to the eye and to the touch. The sponge drum in a power humidifier will be crusty and stiff instead of soft and pliable. Check at least twice a year and more often in the winter when your humidifier is likely to be working harder. Hiring a Snow Removal Contractor: Following are some questions to ask when choosing a snow removal contractor: 1. Does the company have insurance (general liability insurance specifically covering snow removal operations)? 2. Is the organization registered with the Better Business Bureau? 3. Are the employees of the company covered by workplace health and safety insurance? 4. How long has the firm been operating? 5. Does the company have solid references in your area? 6. What type of equipment will be used? 7. How will the company communicate with you? About DLC Leasing Inc * DLC Leasing is the leasing division within Dominion Lending Centres Inc. * Our leasing programs provide up to 100% financing on business-related equipment. * Leasing options include new equipment leasing; used equipment and vehicle leasing; customized solutions through vendor finance programs; and lease-backs –where the lender buys equipment from a business owner and the owner leases it back. * Technology, heavy equipment and trailers, furniture and hospitality equipment, and manufacturing and industrial equipment are just a few examples of available leasing options. * With access to multiple lending sources, Dominion Lending Centres’ Lease Professionals can cater to leasing deals for a variety of credit scenarios ranging from A to C credit quality. * Because many of our Lease Professionals are also licensed mortgage agents, we can offer standard equipment leases and creatively structured solutions for seasonal, new or growing companies. * Working with someone who is both a lease and mortgage expert enables you to even use commercial and residential mortgage and property credit line products, alone or in combination with lease financing, to help achieve the best solutions for your equipment acquisition needs. * Our Lease Professionals can even break up large-dollar transactions into multiple leases across a number of funders to ease and simplify the approval process.   Happy New Year! Welcome to the January issue of my monthly newsletter! This month’s edition takes a closer look at Canadian mortgage debt, as well as offers some tax-saving tips. Please let me know if you have any questions or feedback regarding anything outlined below. Thanks again for your continued support and referrals!   Newspaper editorials have been overflowing lately with speculation on how rising rates may lead to a surge in mortgage defaults. In response to this issue, CIBC Economist Benjamin Tal released a report that took a closer look at the facts and determined history doesn’t support this premise. Below is a summary of Tal’s report. House Prices – Some Overshooting Over the past two years, the degree of volatility observed in the Canadian housing market has been unprecedented. Within this short timeframe, house prices fell by almost 13%, only to rebound by an impressive 21%. Meanwhile, resale activity is now rising by close to 67% on a year-over-year basis after falling by close to 40% in 2008. Housing starts are presently 33% higher than in April 2009 despite dropping by more than 50% earlier in the recession. In fact, no other segment of the economy has rebounded as fast as the housing market, making it one of the real surprises of this recession. This rapid uptick in housing activity, in the face of recessionary conditions elsewhere in the economy, raises concerns about its sustainability, and is causing some to wonder whether house prices are, in fact, rising too quickly given current economic fundamentals. Tal estimates that the Canadian housing market as a whole is indeed beginning to overshoot its “fair value”. At just under $350,000, the current average price of a home is estimated to be roughly 7% over what would be consistent with current housing market fundamentals such as interest rates, income growth, rents and demographics. But this modest overshooting is far from uniform across the country. Those figures are skewed to western Canada, which has seen the most dramatic swings in house prices over the past 24 months. That market now appears to be overvalued by roughly 10-15%, suggesting that the imbalance in the rest of the country is much more modest. Note, however, that overvaluation does not necessarily mean a bubble or a dramatic price correction. Given that the current overvaluation is occurring in a context of historically low interest rates, what we are most likely witnessing is a temporary period of exuberance that is “borrowing” activity from the future, as households take advantage of lower rates and accelerate their borrowing and home purchasing activities. To the extent that current activity is simply a redistribution of sales from the future to the present, the housing market of tomorrow may be in store for a more muted level of activity. Housing starts will also catch up with the sudden spurt in demand, with the increase in supply helping to moderate price trends. Rather than plunging, house prices are more likely to stagnate in coming years (or fall modestly in the most overheated markets) as fundamentals catch up with a market that has gotten ahead of itself.   What Worries the Bank of Canada? Rather than house prices, it is the accelerated pace of borrowing at very low rates that is beginning to raise some concerns at the Bank of Canada. For the first time in the post-war era, real household credit continued to expand through a recession. In fact, mortgage credit is now rising at a year-over-year rate of more than 7%. This strong performance is a clear reflection of an extremely effective monetary policy in Canada. With Canadian consumer confidence only 10 points below its pre-recession level (versus a 50% decline in the US), Canada is benefiting not only from properly functioning credit channels, but also from a household sector that is willing and able to take on new credit. Remember that low rates only work as an economic stimulus if Canadians take advantage of them. The wave of borrowing does, however, have consequences in terms of consumer debt levels. The household debt-to-income ratio is now at a new all-time high of more than 140%. Despite a record low 4.4% effective mortgage rate, overall mortgage interest payments as a share of after-tax income are now at levels that in the past were consistent with a 6% effective mortgage rate. Since rates will no doubt at some point return to those higher levels, the Bank of Canada is worried that Canadians are making themselves increasingly more vulnerable in terms of their ability to continue to service these new, higher debt loads. How Big is the Problem? The relevant question, however, is just how serious a problem it is becoming, and here we have to dig a bit deeper to get the answers. Aside from an unlikely scenario of a 1970s-type stagflation, any future increase in interest rates will be in response to an improving economy. As such, any analysis of the potential impact of higher rates on the household sector in general, and the housing market in particular, should be done with tomorrow’s healthier economy in mind. After all, the reality is that, in the past, interest rates have played only a minor role in driving mortgage default rates. Historically, it’s clear that mortgage arrear rates are highly correlated with the unemployment rate, with little or no correlation with changes in interest rates. The same goes for the economy in general. Over the past three decades, personal bankruptcies have risen twice as fast in an environment of falling interest rates than in an environment of rising rates. And the logic here is obvious – interest rates rise when the economy recovers, and the benefits to employment and incomes of an improving economy easily offset the sting of higher interest rates on debt service costs. Click here to read the full Benjamin Tal report. As always, if you have any questions or concerns about mortgage affordability, I’m here to help!   With the rush of the holiday season and New Year’s celebrations now over, many Canadians are turning their attentions to their taxes. Following are some useful tips to help simplify your 2009 tax filing process and get the most out of future returns. While the 2009 tax filing deadline is months away, January is often the best time of year for Canadians to evaluate their overall tax strategies, especially as time will run out to realize a variety of tax-saving opportunities early this year. Advice for homeowners and prospective homebuyers In 2009, significant tax changes were introduced in the federal budget to benefit homeowners, prospective homeowners and even homeowners who renovated their home, cottage or condo. These include: changes made to the RRSP Home Buyers’ Plan; eligibility for the new non-refundable First-Time Home Buyer’s Tax Credit; and the Home Renovation Tax Credit (HRTC). A $5,000 increase to the RRSP Home Buyers’ Plan means that first-time homebuyers can now withdraw up to $25,000 from their RRSPs for a down payment – tax- and interest-free. The First-Time Home Buyer’s Tax Credit includes a $750 tax credit for first-time homebuyers to help with closing costs, such as legal fees, disbursements and land transfer taxes. And if you’ve been thinking about doing some home renovations, keep in mind that the 15% HRTC of up to $1,350 only applies to eligible home renovation expenses undertaken before February 1st, 2010. RRSP Contributions A Registered Retirement Savings Plan (RRSP) continues to be one of the best tax shelters available to the average taxpayer.     Eligible RRSP contributions are deducted directly from income reported on your tax return. This means that you save taxes at your marginal rate, which may be up to 50%, depending on your income level and province of residence. In addition to the initial tax savings when the contributions are deducted, all income earned inside the RRSP accumulates tax-free until the money is withdrawn. Remember that you have 60 days after the calendar year to make a contribution that qualifies for a tax deduction for that year. RESP Contributions Registered Education Savings Plans (RRSPs) allow people to save for the post-secondary education of children or grandchildren on a tax sheltered basis while reducing taxable income. There are, of course, other advantages to RESPs. With an RESP contribution of $2,500 per child, the federal government will contribute $500 in the form of the Canada Education Savings Grant to the RESP. If a client has prior non-contributory years, the annual grant can be as much as $1,000 in respect of a $5,000 contribution. Do You Have a TFSA? With the introduction of Tax-Free Savings Accounts (TFSAs) on January 1st, 2009, 26 million Canadians aged 18 and older received $5,000 in tax-free contribution room from the federal government. On January 1st, 2010, an additional $5,000 in tax-free contribution room was added to each account. Now is an excellent time to discuss your options for making the most of this new contribution room. Remember that it’s important to review your overall tax-planning strategy with a professional to ensure you’re making the most of any opportunities available to you, especially as a result of new savings and investment vehicles, credits and policy changes that came into effect for the first time in 2009.     We are Canada’s premier online mortgage company, and one of the fastest growing mortgage brokerages nationwide! We have more than 1,500 Mortgage Professionals from more than 200 locations across the country! Our Mortgage Professionals are Experts in their field and many are ranked among the best nationally. We work for you, not the lenders, so your best interests will always be our number one priority. We have more than 100 mortgage programs, making it easy to choose the best fit for your unique situation. We close loans in all 10 provinces and 3 territories. We can process your mortgage in as few as 7 days. We are the preferred mortgage lender for several of Canada’s top companies. Dominion Lending Centres’ Mortgage Professionals are available anytime, anywhere, evenings and weekends – and we’ll even come to you!   2189 Austin Ave Coquitlam BC V3K 3R9

 

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How your mortgage can set you free of other debt 

 Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they’ve allowed to balloon during the past eight years. With their mortgage coming up for renewal, they’re thinking of clearing the slate and rolling the burden into their mortgage.

“We want to consolidate our debt, but we’re not sure if increasing our mortgage is the best way to do it,” says Jack, who asked that his and his wife’s names be changed to protect their privacy.

He’s not alone. Laurie Campbell, executive director of Credit Canada, says it’s a question people grapple with all the time. “Homes in the past have been your sacred cow,” she says, referring to the drive to pay down one’s mortgage as quickly as possible.

These days, however, with people juggling debts and paying varying rates of interest, increasing one’s mortgage can be a smart move, even if it takes longer to pay off.

Lowering interest rates

It’s a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one’s debt, and in his experience, “in almost all cases, it’s justified.”

“If you have debt that is sitting at 18 percent interest, then it certainly makes sense,” says Campbell, adding that it’s something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).

If you’re working with the same lender, there’s often no penalty involved with increasing your mortgage before the term expires.

The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they’re up for renewal at the end of the year and they say they’re serious about getting their finances in order. Ideally, they’d roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.

Dealing with debt

It’s a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. “They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don’t fall victim to that again.”

She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one’s line of credit like a bank account.

The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. “We’re always dipping in to our line of credit because we’re strapped for cash,” says Sarah Stewart. “I think if we consolidate the debt, it’ll increase our cash flow and we’ll be able to live within our means.”

Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: “My job is to make them think outside the box.” She says helping people manage debt, while securing their future, is essential. “People need to think beyond what our parents did, which was paying down the mortgage,” she says. “I used to think that way too, but I don’t anymore.”

In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.

Planning for the future

Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she’d also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).

“This is what I call a lifestyle fund,” says Brox, adding that part of the interest cost on the mortgage would be tax deductible. “It’s a win-win situation, but you’ve got to be really disciplined.”

That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.

“It’s all based on comfort level,” says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don’t have a long-term plan and, as Campbell, pointed out, go back to old spending habits. “People need to have their whole financial picture analyzed. It’s something to consider, but you need to work with mortgage expert that will put together a plan for you.”

Lines of credit

There’s a whole school of thinkers that shudder at the thought of increasing one’s mortgage. At the core of this is that you’re trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.

This works in theory, say our experts, but rarely in real life. “A lot of people just make the minimum payment and never get it cleaned up,” says Brox.

“I’m wary of open lines of credit because they can easily stay at $50,000 forever,” says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.

As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. “We’re putting all the money back into the principal of the mortgage,” says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.

In the Stewart’s case, it’s costing them about $1,000 a month to cover $40,000 debt. If it’s part of their mortgage, it translates into about $200. Ideally they’d direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.

Repositioning debt into one’s mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.

When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: “A lot of times it’s not what you make but how you manage it.”

For more information on this tune into The Mortgage Show, on 980 AM CKNW saturdays at 7pm with Angela Calla, AMP of the year

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