Amid the noise of volatile-but-improving economic indicators, mortgage rate hikes are likely to repeat like a chorus in the coming months.

Canadian banks are raising interest rates on mortgages, marking the beginning of a trend as they correlate with rising bond yields and expected monetary tightening.

That’s making a strong case for borrowers to lock into fixed rates before it’s too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. “The window is closing.”

TD Canada Trust and CIBC both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks where expected to follow the moves shortly.

Effective Feb. 8, the interest rate on the banks’ benchmark five-year closed fixed rate mortgage will increase 25 basis points to 5.44%. The country’s other major lenders are expected to soon follow suit.

Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.

That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee’s finances, she said.

“If you can’t afford [your payments] … that’s a problem,” Ms. Roberts said. “That’s why the government has changed the rules.”

In two stages over the past year the federal government announced changes to the conditions of mortgage lending — shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.

Many who only qualify under the old rules, however, will try to secure mortgages before the shorter maximum amortization periods come into effect next month, Ms. Roberts said.

“There are going to be a lot of people that will enter into their agreements by March 18.”

Much of the momentum in mortgage rates can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a global economy that is proving more robust than expected.

“In my opinion, the bond market will not be the place to be over the next six months, and if that’s the case, you will see mortgage rates continue to rise,” Mr. Tal said.

In addition, anticipation of increases to the Bank of Canada’s benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.

If there was any lingering doubt that the Bank will soon raise rates, last week’s jobs report erased them. The report showed Canada added four times more jobs than expected in January.

“[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front,” said Camilla Sutton, chief currency strategist at the Bank of Nova Scotia. “I think there’s a material change.”

So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data.

Any move by the Bank of Canada could “easily” cause house prices to collapse, Capital Economics warns in a bleak report that suggests the Canadian housing market is likely to suffer the same sort of crash that has plagued countries such as the United States.

The report released Thursday suggests that house prices in Canada have climbed at the same pace as that in the United States, but have not fallen at the same rate. In the United States, some markets have seen prices fall as much as 50 per cent through the recession.

As the central bank raises interest rates, mortgages will become more expensive for Canadians. Add inflation to the mix, and Capital Economics predicts prices could fall 25 per cent over the next few years.

“Even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances as they can change perceptions towards the housing market very quickly,” said economist David Madani. “If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.”

Other market watchers expect higher rates to hinder price gains, but few are calling for as sharp a drop. The Canadian Real Estate Association expects sales to fall 9 per cent this year, for example, but prices are only expected to drop 1.3 per cent. It hasn’t issued a forecast beyond 2011.

The country’s bank economists have varied short-term forecasts, but there are no expectations among the largest forecasters that a crash is even likely.

Some have suggested drops of 10 per cent may be in order next year as mortgage rates move higher and households struggle to service record debt loads, and the Bank of Canada specifically mentioned the prospect of “a more pronounced correction in the Canadian housing market” as one of three key risks to the country’s economy.

However, sales data from the fall market showed that fewer houses have been listed and prices were largely unchanged from a year ago.

Capital Economics’ chief concern is that as the central bank raises rates, variable rate mortgages become more expensive and homeowners could find themselves priced out of their homes.

Fixed rate mortgages are tied to government bond yields, but would move in the same general direction. If a homeowner is already stretched financially, any hike could prove problematic.

However, a survey released by the Canadian Association of Mortgage Professionals released late last year showed that Canadians are confident they could shoulder higher mortgage payments without too much difficulty, with 84 per cent saying a $300 monthly increase was no problem.

If prices do fall as far as he predicts, “the knock-on effects to consumer spending and housing investment could be significant and perhaps even strong enough to push the economy into another recession.”

In January, the federal government shortened the maximum amortization period for mortgages to 30 years from 35 to help Canadians take on less debt at a time when it is at record highs.

While most private sector watchers expect the market to pull back in the second half of this year after a strong two-year run, the Capital Economics call for a 25 per cent drop is the harshest.

After hitting record highs in May, the Canadian market did slow across most of the country through the summer. Recent data from the Canadian Real Estate Association has many economists predicting a “soft landing,” however, with activity returning at a lower level and prices holding steady rather than rocketing higher each month as they have through the recovery. 

OTTAWA—A slower-growing economy is offering little hope to Canada’s 1.4 million unemployed, economists told Finance Minister Jim Flaherty in talks in advance of the March budget.

Unemployment, now standing at 7.6 per cent, will average a slightly higher 7.7-per cent through 2011, according to the average forecast of the dozen economists who met with Flaherty.

Speaking with reporters afterwards, Flaherty said the analysts “anticipate resistance to the unemployment rate coming down.

“This is true also in the United States. A lot of employers have been hesitant to rehire because of their perception of risk in the economy,” he said.

The weak projection for unemployment reflected a more pessimistic view of economic growth in 2011. The economy will expand by only 2.4 per cent this year, a bit weaker than the 2.5 per cent predicted by economists in a September survey.

That compares with growth of nearly 3 per cent last year.

Flaherty said the government, facing a $45-billion budget shortfall in the current fiscal year, is steering clear of any fresh, costly initiatives in its next economic plan.

“Are there billions of dollars of extra money available for big new spending programs? No, and there will be no big new spending programs in this budget.”

He confirmed the budget will be delivered to Parliament in March but declined to say which day.

In the upcoming budget, the government is switching from a period of massive stimulus spending — $46 billion over two years — to concentrate more on fiscal restraint with an eye toward balancing the budget by 2015.

“I can tell you that our goal is to maintain the fiscal track. We’re not far off the fiscal track,” Flaherty told reporters.

The minority Conservative regime is facing the possibility of defeat—and the need to send Canadians to the polls—over its budget.

The government needs one of the federal opposition parties in Parliament to support the March budget or the Conservative regime will fall.

One of the flashpoints with other parties may be Prime Minister Stephen Harper’s decision to go ahead with another round of corporate income tax cuts—worth $6 billion—despite the huge federal budget deficit.

Flaherty has said the government has no intention of backing down on corporate tax reductions. But he said Tuesday there might be room for the Conservatives and the NDP to work together on the issue of additional help for low-income seniors.

“We do have, regrettably, particularly some single older Canadians who are not entitled to the Canadian Pension Plan because in their day they worked at home raising children and did not work outside the home, who have some income issues,” Flaherty remarked.

“And that’s something that, you know, all Canadians I’m sure would like us to address,” he added.

NDP finance critic Thomas Mulcair said he’d be happy to discuss pension issues with Flaherty. But whether the government would be willing to put enough money into overall improvements in pensions to satisfy the NDP is unclear. Layton is calling for the government to expand the Canada Pension Plan, something Flaherty says he is not in a position to do now.

“Our priority continues to be economic recovery,” Flaherty said after the meeting. “The economic recovery remains fragile. Our view is that we must remain focused on creating jobs and economic growth while balancing the budget in the medium term, which is what we intend to do.”

TORONTO — The federal government should limit taxpayer exposure to potential problems in the housing market by reducing the role of the Canada Mortgage and Housing Corp. in the provision of mortgage insurance, CD Howe Institute said in a report Monday.

The CMHC has a pervasive presence in the domestic mortgage market, potentially resulting in “unmanageably large risks in financial markets” that are ultimately borne by the Canadian public, according to the report.

Under current rules, people who borrow more than 80% of the value of the home they want to buy must also take out insurance, and the CMHC is by far the most dominant player in that market.

According to the report by Finn Poschmann, vice-president of research at the CD Howe Institute, the CMHC now backstops mortgages equivalent to more than 30% of Canada’s gross domestic product.

That’s left Canadians exposed to “large, ill-defined risks,” said the document, which argues that Ottawa should crank back the CMHC’s presence in mortgage insurance and allow more room for private sector insurers.

Originally conceived as a vehicle for executing public policy, CHMC insurance levels have expanded dramatically, especially in the wake of the financial crisis as the government encouraged banks to hike lending by allowing them to securitize more home loans.

Critics worry that the unintended consequence of government policy was that mortgages became too easy to get, pushing up real estate prices across much of the country to unsustainable levels.

“Beyond the presumed benefits of promoting home ownership, [activities of the CMHC] have had some clearly harmful and well-understood consequences, as well as other less well-understood but also harmful consequences in world financial markets,” Mr. Poschmann said.

The CD Howe recommendation comes on the heels repeated warnings from the Bank of Canada that Canadians have become over leveraged and need to start paying down debt.

One of the main concerns about the CMHC is the lack of disclosure about the quality of its mortgages and details of the types of loans it insures. For instance, when the government announced earlier this month that home equity lines of credit, or HELOCs, would no longer qualify for CMHC insurance, many analysts expressed surprised that such loans were ever allowed to be part of the CMHC program in the first place.

Canada is hardly alone in its policy of boosting home ownership as the United States and many other countries have adopted similar initiatives. But Canada is one of the few western nations that have not so far been hit with a steep decline in real estate prices in the wake of the financial crisis.

The report also makes the case for beefed up oversight of CMHC as right now its relationship with the Office of the Superintendent of Financial Institutions is primarily a courtesy arrangement under which the crown corporation is not compelled to follow OSFI directives.

According to Mr. Poschmann, Ottawa should adopt new legislation to remove the ambiguity from the relationship by legally requiring the CMHC to comply with guidelines laid down by the federal regulator.