OTTAWA — New home prices edged up 0.1% in December, according to Statistics Canada, with Winnipeg leading the gains.

Economists had expected the federal agency’s new home price index to rise 0.2% in December, following a 0.3% advance in the previous month.

The index showed a 1.1% gain in Winnipeg, as well as a 0.3% increase in Halifax and a 0.2% rise in Toronto and Oshawa.

The biggest decline was in Windsor, Ont., down 0.6%, followed by Montreal and Quebec, which both recorded a 0.3% drop.

The slower pace of price increases reflects a weakening in Canada’s housing market.

On Tuesday, the Canadian Real Estate Association revised up its outlook for housing resales in 2011, but is still calling for sales to fall 1.6% this year to 439,900 units and for prices to edge up by only 1.3% in each of 2011 and 2012.

Meanwhile, Canada Mortgage and Housing Corporation said the seasonally adjusted annual rate of housing starts totalled 170,400 units during in January, down more than 10% from 2010’s total of 189,930 units.

TORONTO – There was a surprising drop in the amount borrowed on credit cards by Canadians during the holiday-laden fourth quarter, but overall non-mortgage debt went up substantially across the country, a credit analysis firm reported Wednesday.

TransUnion said average total debt per Canadian consumer, excluding mortgages, was $25,709 in the fourth quarter of 2010 — up 5.6 per cent from $24,346 in the comparable period of 2009.

Only a small portion of the total in either year was drawn on credit cards, which usually charge among the highest rates of interest.

The surprise, according to TransUnion, was that the average credit card debt in the fourth quarter of 2010 dropped by 2.7 per cent from a year earlier to $3,688.

Lines of credit were the biggest form of consumer debt tracked, and increased to nearly $34,000 — up 8.8 per cent over the year.

“From the increase in lines of credit this quarter, one can safely assume that many Canadians ultimately relied on this form of credit during the last three months of 2010 and the important holiday shopping season,” said Thomas Higgins, TransUnion’s vice-president of analytics.

“Since many lines of credit offer attractive interest rates, many Canadians have learned to use credit cards in their initial purchase and then pay off or down the balance using their line of credit. This allows them to take advantage of both the loyalty programs many credit cards offer and lower interest rates of their line of credit.”

Auto loans were the second-biggest form of non-mortgage debt tracked by the report and TransUnion found the Canadian average rose to nearly $16,200 per borrower in the fourth quarter, up 11 per cent from a year earlier.

However, it found that total auto debt for the country as a whole declined to $45.8 billion in the fourth quarter, from $48.3 billion in the comparable period of 2009.

“While total auto debt continues to decline in Canada, it is interesting to see auto debt per auto borrower rise,” Higgins said.

“This means those Canadians with autos loans are either purchasing higher end vehicles, or newer ones.”

TransUnion’s analysis is based on an active credit population of 24.9 million consumers in Canada.

Here we go, again. The economy is generating more jobs, a handful of banks raise mortgage rates and all of a sudden you’re being advised to lock-in your mortgage before the bank doors slam shut. In fact, some say you’d better hurry-up and buy a house now before mortgage rates go so high you’re locked-out of the housing market for ever.

This is not the first time that mortgage rates are on the brink of blooming only to fade a few months later. This has happened more than a handful of times in the last decade. The headlines are often the same. A month or two of increasing mortgage rates, the public is urged to act now, and then a few months later something unforeseen appears on the horizon.

The last occasion was just over a year ago. The posted 5-year mortgage rate in March, 2010 went from 4.7 per cent to 5.15 per cent in April, and then to 5.3 per cent by May. The recommendations were clear: lock-in. But then, by October they were back to 4.5 per cent. The economy sputtered, Greece and Spain hit the headlines and the rest was history.

Don’t get me wrong. Short-term interest rates are abnormally low today and the Bank of Canada has pledged to raise them eventually. But that is a far cry from advocating that you lock-in your mortgage – which is actually driven by long-term bond market rates – or heaven forbid using this as an excuse to buy a house you can’t really afford.

My main concern is about relevance and context of this advice. I call it the fallacy of “carve-out thinking.” It stems from the misguided notion that modern-day personal financial problems should be viewed and solved in isolation.

Remember that mortgage payments are just one component of your personal balance sheet. You may also have an RRSP, TFSAs and other investment accounts. You may also have a pension, cottage or rental property and a very large portfolio of debt. Every one of these holdings is sensitive to interest rates.

If long-term interest rates move up quickly and substantially then any bonds or fixed income investment you hold will fall in value – possibly by a lot. A big and sudden rise in interest rates won’t be kind to the real estate market either. There will be many spillover side effects.

Reacting to this fear by locking-in your mortgage is akin to preparing for an ice and snow storm by only salting your driveway, but forgetting to close your windows. Sure, that helps, but if you really believe a bad storm is on its way, there are many other – possibly more important—things you should be doing to prepare.

So what should you do with your mortgage? Here’s the best guidance I can offer.

1.Don’t rush into home ownership because you are convinced that mortgage rates are headed-up and you will never see 5 per cent again.

2.If you’ve just bought a home and you have a large mortgage, relative to the home’s value, I urge you to lock-in for as long as possible. You probably should not have “floated” to begin with and are now facing the probable risk that real estate prices decline and interest rates increase. Add to this the possibility of job loss, disability or other macro factors, and you are the ideal candidate for a fixed rate mortgage. The last thing you want to be doing is trying to renew your mortgage in a year or two from now, if rates increase and possibly the appraised value of your house has declined by 10 per cent or more.

3.If your mortgage payments are only a small fraction of your monthly expenses and you have built-up substantial equity in your home, and – this is key – you have a diversified portfolio of financial assets, like stocks and bond inside your RRSP and other accounts, then my advice to you is very different.

If you are concerned that interest rates are on their way up, then perhaps you should change your asset allocation and reduce the fixed income investments in your portfolio. Remember, if mortgage rates increase, this is because long-term interest rates have gone-up and the longer the duration of your bonds, the greater are your losses. I say, lighten-up on bonds. If the prognostications prove correct and rates go up, then yes you will pay more on the mortgage but you were spared the pain in your RRSP. On the other hand, if rates stay around their current levels, then you win. . Remember, locking-in today will likely involve paying more than what you are paying right now, often by 1 per cent to 2 per cent more. Think of it as insurance.

The point is to think more holistically about all the financial assets – and risk exposures—on your personal balance sheet. As for me, I have a floating rate mortgage because I can tolerate the risk and want to pay as little as possible for unnecessary insurance

Canada Mortgage and Housing Corp. is taking the unusual step of publicly challenging its critics, defending its reputation and its business model amid mounting calls for change.

On Monday, the Crown corporation e-mailed to the news media copies of letters that its vice-president had sent to three think tanks which recently published research reports critical of the extensive role that CMHC plays in the housing market and the risk that creates for taxpayers.

The move comes as the Obama administration signalled last Friday that it thinks the U.S. government should no longer play a major role in that country’s housing market. In doing so, it rejected adopting a Canadian-style system, which CMHC critics argue bolsters the case for re-examining the role of the Canadian agency.

“While starting from different places, there are interesting similarities between Canada and the U.S., where we have governments explicitly on the hook for large amounts of mortgages,” said Finn Poschmann, vice-president of research at the C.D. Howe Institute, which two weeks ago published a report entitled, “What Government should do in Mortgage Markets.”

CMHC is by far the largest provider in Canada of default insurance on mortgages, which home buyers are legally required to have if their down payment is smaller than 20 per cent. Ottawa created CMHC in 1946 to house returning war veterans and its role in the housing market has steadily expanded in the decades since.

Mr. Poschmann is one of the critics who received a letter from CMHC’s vice-president of policy and planning, Douglas Stewart. In it, CMHC argues that the Canadian model is cost-effective, and has provided the Canadian taxpayer with $12-billion over the last decade in profits and income taxes.

“Most importantly, the Canadian model withstood the test of the economic downturn, when housing markets in the U.S., United Kingdom, and Ireland failed,” Mr. Stewart wrote.

He also shot back at suggestions from Mr. Poschmann and others that CMHC should be subject to formal oversight from Canada’s financial regulator, the Office of the Superintendent of Financial Institutions, noting that CMHC already complies with OSFI guidelines.

Letters also went out to David Madani at Capital Economics and Jane Londerville at the University of Guelph, who published papers about CMHC earlier this month and last November, respectively.

Mr. Stewart’s letters and the decision to make them public is a departure for CMHC, which tends to shy from discussions about itself and rarely makes executives available to news media. “Simply put, CMHC felt it was important to have a discussion based on factual information,” spokesman Charles Sauriol said Monday.

Mr. Poschmann said CMHC’s mandate is being debated now because of the U.S. situation, where taxpayers have been left on the hook for trillions of dollars in mortgages and policy makers are grappling with how to prevent that from occurring again.

CMHC’s critics aren’t swayed by the global recognition and kudos that the Canadian system, and the agency’s role within it, has received in the wake of the financial crisis. “Underwriting practices in Canada have been better than the U.S., and there’s no question we’ve been more stable than the U.S. has,” Mr. Poschmann said. “That said, that doesn’t mean there aren’t risks here.”

The greatest risk stems from the fact that Canadian housing prices are high relative to incomes, and consumers are shouldering large debt loads, he said. Any correlated market shocks could have serious consequences.

Although last week’s report from the U.S. Treasury Department on the mortgage system did not refer to the Canadian model, it essentially rules out the creation of something similar.

“The U.S., in terms of looking at the full range of options that they could pursue, very much decided to look at options that do not create the same taxpayer vulnerability as the Canadian system creates,” said Neil Mohindra. A year ago, he published a report for the Fraser Institute recommending that CMHC’s mortgage insurance business be privatized. Mr. Mohindra said he did not receive a letter or other response from CMHC at the time.

Mr. Mohindra agreed with Mr. Poschmann and other critics that even if CMHC is complying with OSFI rules, oversight by the regulator would force the agency to provide much more information to taxpayers, as private mortgage insurers do. “They say they comply with OSFI guidelines and … I’m sure they do,” he said. “The point is they don’t publish the data to support that compliance.”

That is Taco Bell’s slogan.  It’s meant to remind us that fast food doesn’t end with hamburgers. Tacos are pretty tasty in their own right.

In the lending world, the closest equivalent to “the bun” is the 5-year fixed mortgage. Like hamburgers are to fast food, the 5-year fixed is to mortgages. It’s been the most popular term in Canada for years.

Yet, despite its prevalence, qualified borrowers owe it to themselves to think outside the 5-year fixed. A little extra risk can sometimes yield a lot more reward.

Fixed 5-year mortgages are especially popular in uncertain/rising rate markets (like today’s). People who can’t afford rate risk, and those who cannot qualify for shorter terms, often choose a 5-year fixed by default.

Even individuals with rock-solid financial resources frequently gravitate to 5-year terms. Much of the time that’s because they don’t want to overthink the safety of a longer-term mortgage. In other cases, it’s because no one has ever shown them how much 5-year fixed terms really cost over the long run. 

No matter how popular 5-year terms are, however, mortgages are not a one-size-fits-all proposition.  For those who can stomach the chance of higher rates at renewal, various compelling alternatives exist. One happens to be the 3-year fixed.

Lenders like Merix Financial, HSBC, and others still have three-year rates in the 3.35% range or better. That’s 59+ basis points below current 5-year pricing.

At those rates, (from a purely mathematical and hypothetical perspective) the 3-year fixed performs better in our internal simulations than any other term, be it a variable or a 1, 2, 4, 5, 7 or 10-year fixed.¹

With major banks forecasting a 2% rate hike in 24 months, 3-year fixed mortgages model even better than variable-rate mortgages (primarily because of the 3-year’s low rate and its 36 months of rate-hike protection).

This doesn’t mean a 3-year will definitely save you more money than any other term. It just means they offer very good value with decent odds of interest savings.

On a $300,000 mortgage with a 25-year amortization, a 3.35% three-year will save you about $5,130 over a 3.94% five-year fixed. That’s over 36 months.

After 36 months, you can move into any other term you want (e.g.,  a 1-year fixed, variable, or another 3-year fixed). As long as your rate at renewal is about 5% or less, you’ll come out ahead of today’s 5-year fixed.

A few other points about 3-year terms:

• You can make your 3-year fixed payment equal to a 5-year fixed payment, thus shrinking your amortization even faster.
• People tend to refinance 5-year terms roughly every 3.5 years on average. Three-year terms let people out without a penalty just before many of them are getting ready to renegotiate their mortgage.

The “optimal term” (if there is such a thing) changes as rates fluctuate and as borrowers’ finances change.

All things considered, however, the three-year fixed is the sweet spot of the mortgage market at this particular point in time. 

A stronger economy will offset the effects of higher mortgage rates and keep Canadian house prices stable over the next two years, according to the Royal Bank of Canada.

In a market update that has the bank forecasting price gains of 0.5 per cent in 2011 and 1.3 per cent in 2012, economist Robert Hogue said that after two years of “gyrating wildly,” the Going forward, we see nearly perfectly offsetting forces driving Canada’s housing market,” he said. “On the upside, the economic recovery will gather strength in 2011, continuing to boost employment and family incomes. On the downside, interest rates are expected to rise.”

The Bank of Canada will likely raise interest rates by 100 basis points this year and another 150 basis points in 2012, he said, making mortgage payments more expensive for the majority of homeowners. But real gross domestic product is expected to increase to 3.2 per cent in 2011 from 2.9 per cent in 2010.

“The net effect of these forces is expected to be close to nil, thereby leaving resale activity largely flat,” he said.

There have been a flurry of forecasts issued in the last week,  as the market starts the year stronger than expected

Canadian housing market is likely to be a much less interesting place for the next several years. Capital Economics issued a cautious report that suggested higher interest rates could drive prices down as much as 25 per cent over the next three years, while the Canadian Real Estate Association raised its sales forecast for the next two years as it suggested that a stronger economic recovery and continued low interest rates would keep the market balanced.

“Even though mortgage rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity,” CREA chief economist Gregory Klump said. “Strengthening economic fundamentals will keep the housing market in balance, which will keep prices stable.”

Capital Economics economist David Madani said too many optimistic forecasts are based on too short a time frame to be useful, because many mortgages won’t reset until rates rise much higher than they are today.

“Let’s balance this discussion a bit and think longer term,” he said in a recent interview. “As far as housing prices are concerned, we think they’re overvalued and we don’t see income growth closing that gap.”

OTTAWA – Canadians are becoming increasingly exposed to a debt crunch but the situation has not reached crisis level and likely won’t, according to two of the country’s leading banks.

In separate reports Wednesday, TD Bank (TSX:TD) and the Bank of Montreal (TSX:BMO) took different approaches to one of the hottest topics facing households and policy-makers and came to essentially the same conclusion — the situation is currently manageable.

TD introduced a new index on debt Wednesday showing households in British Columbia are most vulnerable to a shock, such as substantially higher interest rates, falling incomes or a crash in house prices.

B.C. is followed by Alberta and Ontario as the only provinces above 100 on the index. Least vulnerable were Manitoba, the Atlantic provinces and Quebec.

But chief economist Craig Alexander says no region — including B.C. — is so vulnerable as to sound the alarm bells, partly because few expect a shock sufficiently serious to push many households into default.

“Despite the picture of growing vulnerability from coast to coast over the past few years, we do not believe that there is a household financial crisis in the making in any region,” he said.

BMO deputy chief economist Douglas Porter analyzed Canadians’ savings rate at a time when household debt compared to annual disposal income has climbed to a record 148 per cent.

The high debt is a reason for concern, says Porter, but the number ignores the fact that thanks to a “near-miraculous” recovery in stock prices, along with rock-solid house prices, household assets are also at near record levels. Assets to income rose to 420 per cent in the third quarter of 2010 and are still rising, he said.

And at the moment at least, debt service levels are actually falling thanks to super-low interest rates.

“The short answer is I don’t think we do … have a debt crisis, and a lot of the steps we’ve taken will help avert it,” he said.

Both banks cite Finance Minister Jim Flaherty’s recent announcement to tighten mortgage eligibility rules as a step in the right direction, adding ballast to a housing market that is the prime reason for Canada’s high debt levels.

Porter said hikes to interest rates, which many expect will occur as the economy strengthens in the next few years, will also help Canadians increase their savings rate because of higher returns.

Several banks hiked their three- to five-year mortgage rates by up to one-quarter point this week, a measure that Flaherty said would help further cool the housing market. The Bank of Canada, however, is holding short-term interest rates low for now.

As interest rates rise, Alexander says households across Canada will become more vulnerable to shocks.

But he said interest rates are most likely to rise slowly, giving borrowers time to adjust. At the same time, incomes are projected to grow at between 3.5 and four per cent over the next few years, which would provide a cushion to homeowners with big mortgages.

The major concern is another economic shock which, while unlikely, would put Canadians carrying large debt loads into difficulty.

OTTAWA – Interest rates are going up, and the federal finance minister says he expects them to rise even more.

The Royal Bank increased several of its posted and special mortgage rates on Tuesday, joining TD Bank and CIBC.

All three banks have increased the posted rate for a five-year closed mortgage by a quarter of a percentage point, to 5.44 per cent.

RBC also raised its special fixed rate offer for a five-year closed mortgage by the same percentage amount, to 4.39 per cent.

Finance Minister Jim Flaherty said he’s not surprised.

“The recent increase by a couple of the banks is exactly what we expected,” Flaherty told reporters in the foyer of the House of Commons.

And more increases should be coming, Flaherty predicted, since lending rates have been hovering close to historic lows.

“We’re likely to see higher interest rates as we go forward because interest rates are still very low.”

Flaherty commented as he denounced a Liberal opposition day motion calling on the Harper government to reverse a planned 1.5-percentage-point corporate tax cut.

TORONTO – Canadian home sales this year will be better than previously thought, helped by improving consumer confidence that will partially offset the anticipated deterrent of interest rate hikes, the Canadian Real Estate Association predicts.

CREA released a revised forecast Tuesday that estimates there will be 439,900 existing homes sold in 2011, down 1.6 per cent from 2010, but better than the nine per cent decline that CREA had forecast at the end of last year.

The real-estate association is also taking a more positive view of pricing, with the national average price now expected to rise by 1.3 per cent in 2011 to $343,300. CREA had earlier predicted that the national average home price in 2011 would fall by 1.3 per cent from last year to $326,000.

CREA’s January sales data won’t be released until next week. But recent reports on building permits and housing starts — two indicators of how much new housing will be available for sale in future — indicate a measured start to 2011.

Canada Mortgage and Housing Corp. reported Tuesday that the pace of new-home construction in Canada increased slightly last month, rising to 170,400 units, up from 169,000 in December on a seasonally adjusted annual rate.

That puts the country on a pace for about 10 per cent fewer housing starts than last year.

Krishen Rangasamy, an economist at CIBC World Markets said housing starts will likely soften over the coming months as home prices moderate and the Bank of Canada resumes its tightening cycle by mid-year.

A moderation in housing starts is a sign that supply is contracting in line with reduced demand, which could avoid an unhealthy glut of available houses on the market if demand declines when interest rate hikes are announced.

Some economists have warned that a combination of higher interest rates and new mortgage rules that go into effect March 18 could put a chill on demand in the later months of this year.

CREA predicted Tuesday that some sales that would have been made later in the year will likely occur in the first quarter, as a result of the new rules. A previous change in mortgage rules last year contributed to extremely strong first-quarter demand as buyers sought to beat the deadline.

“This is expected to produce a milder version of the volatility in sales activity that we saw last year which resulted from additional transitory factors,” said CREA’s chief economist Gregory Klump.

Last year, sales were also pushed ahead to the first part of the year as buyers in two provinces — British Columbia and Ontario — rushed to avoid a switch to the harmonized sales tax on July 1.

Those factors exacerbated the effect of interest rate hikes last summer and the market reached a trough in July.

Following last year’s pattern, sales will likely be robust in the first quarter as buyers enter the market before the tighter mortgage rules take effect and then drop off in the second quarter.

However, CREA predicts that the market will gain traction in the second half of this year as economic conditions, job and income growth and consumer confidence improve, in contrast to 2010 when economic growth softened.

“Even though mortgage interest rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity. Strengthening economic fundamentals will keep the housing market in balance, which will keep home prices stable,” Klump said.

The Bank of Canada has forecast that housing will be a minor net negative for the economy this year, although it also cautions the market is a potential key downside risk for the economy.

It is expected to maintain its key lending rate at a low one per cent until at least the second half of the year, as some global economic uncertainty lingers. The key lending rate has the most immediate impact on variable-rate mortgages whereas home owners with fixed-rate mortgages won’t be affected until renewal time.

The Royal Bank (TSX:RY), CIBC (TSX:CM) and TD (TSX:TD) said this week they are raising the posted rate for a five-year closed mortgages by 0.25 percentage points to 5.44 per cent.

Meanwhile, Finance Minister Jim Flaherty warned Tuesday that Canadians should expect long-term mortgage rates to rise further.

“The recent increase by a couple of the banks is exactly what we expected,” Flaherty told reporters in the foyer of the House of Commons. “We’re likely to see higher interest rates as we go forward because interest rates are still very low.”

Last week, in the gloomiest report to date, Capital Economics analyst David Madani said house prices were just a few interest rate hikes away from a 25 per cent correction over the next three years.

However, a report released Tuesday by real estate agency Re/Max suggests the Canadian market has shown resiliency in the wake of major events in the past decade, such as the 9-11 terrorist attacks in 2001, the SARS health crisis in 2003 and the 2008-2009 recession.

The report said the market has self-adjusted as inventory dwindled during periods of reduced demand.

Through tumultuous times in the past decade, fewer real-estate listings led to higher home values, with national home prices increasing at an average of 6.82 per cent annually.

The market is on track to a similar realignment this year as the number of available homes trends downward, suggesting that the market is closer to seller’s territory, in which prices spike said Christine Martysiewicz, a spokeswoman for Re/Max.

“Interest rates would have to go up significantly before we see any impact, and we wouldn’t see an immediate impact,” Martysiewicz said.

“To say that there might be another real estate bubble is really not a responsible comment.”

CREA forecasts that national sales activity will rebound in 2012 by three per cent to 453,300 units, which is roughly on par with the 10 year average.

It believes the market will continue to be relatively balanced between sellers, or supply and buyers, or demand, although the supply of new listings of existing homes is expected to trend higher.

TORONTO, Feb. 8 /CNW/ – Canadians are less optimistic about the outlook for the national economy and their personal financial situation in 2011 than they were last year, according to the January 2011 RBC Canadian Consumer Outlook Index (RBC CCO). Less than half (43 per cent) of Canadians feel the economy will improve over the next year, a marked decline from the 56 per cent reported in last January’s RBC CCO. In addition, only 38 per cent of Canadians now feel their personal financial situation will improve over the next 12 months, compared to 45 per cent a year ago.

The prevailing mood was reflected in the tight rein many Canadians kept on their expenses over the past holiday season, with 67 per cent responding that they managed not to overspend their holiday budgets. Of this majority, 28 per cent reported they had kept track of their spending by making a budget and sticking to it; 26 per cent stated they knew how much they had to spend and “once the money was gone, that was it”. By far, the largest number of respondents (46 per cent) said that they stayed within their budget because they didn’t want to go into debt or increase their debt load.

“We know that managing debt is top of mind for Canadians. Having a budget in place that you can stick to is one of the best ways to keep your finances in balance and take care of any debts,” said Ashif Ratanshi, head, Branch Investments, Deposits and Direct Investing, RBC. “This also gives you a good base from which to do your financial planning for the year. Ideally you want to ensure you are saving money for your future as well as covering your expenses today. Good financial advice can help you do both.”

Despite the cautious economic outlook expressed by the majority of Canadian respondents, there are indications that Canada’s economy will continue to grow in 2011 and 2012.

“While the pace of the recovery will remain moderate, we are projecting growth of 3.2 per cent this year and 3.1 per cent in 2012, representing the fastest pace of growth over the past four years,” noted Craig Wright, senior vice-president and chief economist, RBC. “As the economy continues to expand, we expect interest rates to drift moderately higher through the coming year. This should limit pressure on household balance sheets in an environment of continued employment gains.”