OTTAWA (Reuters) – Canadian new home prices rose more than expected in January and hit a record high, but the pace of growth was the slowest since March, adding to evidence that the housing sector is starting to cool.

Statistics Canada’s new housing price index, released on Wednesday, rose 0.2 percent in January from December. Analysts in a Reuters poll had forecast a 0.1 percent increase, following a 0.1 percent gain in December.

Compared with January 2010, prices were up 1.9 percent, easing from a 2.1 percent year-on-year gain in December. It was the smallest annual rise since March.

After taking a brief hit from the financial crisis, Canada’s housing market bounced back strongly in 2009 and helped drive the economy out of recession, fueled by low mortgage rates and relatively healthy banking sector.

But double-digit price gains seen in late 2009 and early 2010 worried policymakers and prompted the Canadian government to tighten mortgage rules. Three interest rate hikes by the Bank of Canada last year also helped cool demand.

Analysts expect more rate increases this year and say the lagging impact of tighter mortgage rules will further drag on the housing sector. Economic recovery in Canada is now expected to be driven less by housing and more by business investment and export growth.

Earlier this week Statscan reported that the overall value of Canadian building permits dropped by 5.1 percent in January from December, mainly due to a fall in applications for permits for condominium buildings.

HOUSING POLL SHOWS CONFIDENCE

The January new-home price data showed the biggest increase in Winnipeg, Manitoba, up 0.7 percent, as builders introduced new list prices at the start of the year.

Prices climbed in nine of the 21 cities surveyed, with gains recorded in Toronto and Oshawa, Ontario, as well as in Quebec City and Montreal. Prices were flat in nine cities and edged down in three.

Separately, a poll released by Royal Bank of Canada, the country’s largest lender, on Wednesday showed Canadians are assiduously paying down their mortgages and are confident they have the means to weather a drop in house prices.

It showed almost three-quarters of Canadians, or 73 percent, believe that they or their families are well-positioned in the event of a home-price fall.

The Canadian housing sector continued to show solid growth in February as housing starts moved up about 6.5 per cent from the previous month.

Canada Mortgage and Housing Corp. said the seasonally adjusted annual rate of starts came in at 181,900 units, up from 170,600 units in January.

CMHC said the rise was due primarily to increased activity in the multi-family starts in Ontario and the Prairies.

The seasonally adjusted annual rate of urban starts increased by 9.4 per cent to 161,000 units in February. Urban multiple starts were up by 14.5 per cent in February to 94,900 units, while single urban starts edged higher by three per cent to 66,100 units.

Rural starts were estimated at a seasonally adjusted annual rate of 20,900 units in February.

Despite the better than expected growth in housing starts, analysts caution that the pace will slow during 2011.

“We continue to expect a softening in overall housing starts, particularly with the anticipated higher interest rates and a slower second half of the year keeping home prices under wraps,” said CIBC World Markets economist Krishen Rangasamy.

When mortgage rates are falling, banks will vie for your business. But in times like these when rates are rising, you have to shop around and negotiate to get the best rate.

This was the situation I faced in 1994 when we bought our first home. This strategy saved us tens of thousands of dollars over the last 17 years. By shopping around and going back to my bank with better deals offered by their competitors we managed to keep getting better deals. The lesson is to do your homework, a bit of research and don’t be afraid to ask.

Rates were at a 30-year low when Jeff and I first started house hunting in 1994. We were long-time Royal Bank of Canada customers, but we went to a different bank for a quote in the hopes that we’d get some bargaining power. Canada Trust quoted us half a percent below the posted rate of 7.25 per cent, provided we moved our business to them. We went back to RBC and they matched the rate and kept our business.

Three years later, rates fell, and I wanted to renegotiate the mortgage.  I shopped around and was offered 1.5 per cent below our RBC rate.  RBC ‘s penalty was  three months’ interest (roughly $1500) but they offered a compromise of 1.25 per cent below our current rate and extended the five-year term. They  kept our business.

We successfully used this same strategy twice more  and were down to 4.64 per cent in 2003 but we still paid our mortgage as though our rate were 2 percentage points higher.

Our mistake happened in the fall of 2008 at renewal. Rates were rising and RBC said their best rate was 5.55 per cent for “preferred” customers. I shopped around firmly believing that others would want our business. Scotiabank and TD Canada Trust didn’t. President’s Choice Financial offered the lowest rate at 5.2 per cent and RBC would not match it. We took our mortgage to PCF.

The mistake is that we should have gone with a variable rate, according to Moshe Milevsky’s
column.  He says that homeowners – like us – who have substantial equity in their home and have a diversified portfolio of financial assets, should go variable. But I knew that would keep me awake at night, worrying about how much of our payments was going to interest and how much to the principal. We locked our rate for five years and watched rates plummet six months later. 

Recently I tried my mortgage-breaking tactics with PCF and asked how much the penalty would be. They used interest rate differential which is far higher than three months’ of interest payments. See Ellen Roseman’s excellent article on “How mortgage penalties can hurt you.” 

PCF wasn’t concerned that I would pay the penalty and leave. Instead they wondered if I’d be interested in a line of credit? As readers know from my line of credit woes, that’s the last thing I wanted! I’m still paying the same rate, but the banks should be worried when I renew. I may well be able to self-fund through my RRSPs and leave them asking why they lost a “preferred” customer

The Bank of Canada is sticking to its ultra-low interest rate policy to help the recovery, despite mounting evidence the economy is performing better.

And economists said the central bank’s surprisingly “dovish” statement suggests Canadians will be able to borrow at historically low interest rates for months to come.

The bank’s decision Tuesday keeps its trendsetting overnight policy rate at one per cent, where it’s been since last September.

Few had expected Governor Mark Carney to raise rates, but analysts were looking for a signal of future hikes after news Monday that the economy grew by 3.3 per cent in the final quarter last year — a full point higher than the bank had projected.

“The recovery in Canada is proceeding slightly faster than expected and there is more evidence of the anticipated rebalancing of demand,” the bank said in a grudging acknowledgment of robust fourth-quarter growth that many believe has carried over into the first quarter of 2011.

Most of the five-paragraph statement was devoted to highlighting that not much had changed and that the risks to the global recovery remain elevated. The bank also warned that the strong Canadian dollar and the poor productivity of Canadian firms will slow export growth.

On future intentions, the bank recycled a line used before that any tightening to monetary policy will need to be carefully considered.

“If the bank really was contemplating an early rate hike, we would have expected that forward looking guidance to be altered,” said David Madani of Capital Economics.

TD Bank said the new economic data suggests the economy’s non-inflationary growth potential is stronger than previously estimated, which means the Bank of Canada could upgrade its growth forecast without touching interest rates.

Carney’s overriding message was similar to that of U.S. Federal Reserve chairman Ben Bernanke , who, in testimony to Congress on Tuesday, appeared equally wary of the traps that could still ensnare the economy.

Carney cited sovereign worries debt in Europe, the strong loonie, poor productivity and high commodity prices as possible areas of trouble.

“That’s the general tone across global central banks. They have a huge uncertainty premium, because we just don’t know how developments in Europe, the Middle East and commodity markets will unfold,” Scotiabank economist Derek Holt said.

“The last thing you want to do is to signal hawkish expectations right now and look foolish three to six months down the road.”

Economists also noted that Carney likely wanted to avoid giving any upward boost to the loonie by signalling bullish intentions.

Currency traders reacted to Carney’s cold shower by shaving 0.37 of a cent from the loonie to 102.57 cents U.S.

It may also be that, like some private-sector economists, Carney is not yet a believer that the better economic performance of the past few months will hold up. While several forecasting houses have revised their outlook for this year, TD Bank chief economist Craig Alexander believes the quick start will yield to a steady slowdown as the year proceeds.

Economists mostly stuck to their predictions for when Carney will start hiking rates — ranging from May to the end of 2011.

The Bank of Canada’s governing board is expected to send a clearer signal on April 13, when it next issues its quarterly outlook for Canada and the world. The stand-pat decision Tuesday was the fourth consecutive time Carney has kept short-term interest rates unchanged.

Last week, the C.D. Howe Institute panel on monetary policy recommended Carney start raising the rate to ward off future inflationary pressures. The bank did express concern about inflation but said so far it has shown up only outside of Canada’s borders. In Canada, “underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy,” it said.

The bank cited early evidence of a recovery in net exports and strong business investment as key drivers of the recovery. But it also cautioned that poor productivity and the strong loonie will act as anchors to export growth going forward.

“The export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance” it said.

Canada’s economy ended the year with a bang in 2010, setting the stage to a strong start this year that likely bodes well for jobs, corporate profits and government finances.

Statistics Canada said Monday the economy expanded a surprisingly sprightly 3.3 per cent in the last three months last year, a full point more than the Bank of Canada had predicted and ahead of the U.S. pace. Adding to the good news, the agency revised upwards the results of the third quarter to 1.8 per cent from one per cent, enabling the country to finish the year with an overall 3.1 per cent increase in gross domestic product.

And December’s 0.5 per cent growth compared with November provided a strong hand-off to Q1 performance this year, economists noted.

“On balance, this report stands up to careful scrutiny in signalling greater than expected breadth of growth in the Canadian economy,” said Derek Holt, vice-president of economics with Scotia Capital.

Commenting in the House of Commons, junior finance minister Ted Menzies noted that Canada had topped the G7 in the fourth quarter, and used the occasion to attack the Opposition.

“The last thing we want is for a Liberal increase of $6 billion on (corporate) taxes that will kill jobs, that will slow growth,” Menzies said.

No economists mentioned corporate tax cuts, either those that have occurred or next year’s scheduled additional 1.5 percentage point trim, as a reason for the strong quarter.

Instead, analysts pointed to the 17 per cent annualized surge in exports to the world, and especially to the United States, as the key contributor. Also helping out was a 4.9 per cent jump in consumer spending.

Meanwhile corporate profits rocketed up 41 per cent in the fourth quarter.

Bank of Montreal economist Douglas Porter said the strong hand-off points to the first quarter of this year coming in even better, at around 3.5 per cent. The CIBC was more optimistic, expecting a four per cent growth rate.

Porter and his forecasting group have now joined the Royal Bank and Merrill Lynch in projecting growth for 2011 above three per cent, well above the Bank of Canada’s 2.4 per cent call.

That might get Bank of Canada governor Mark Carney thinking about hiking key rates sooner rather than later, analysts said. The central bank’s target overnight lending rate has been at one per cent since September, but still remains below historical norms.

The bank lowered its overnight target rate to an all-time low of 0.25 per cent in April 2009 in order to stimulate borrowing and economic activity in the wake of a deep credit crisis that began six months earlier.

The bank started edging up the rate in three quarter-point increments that began last June but paused in the monetary tightening after Canada’s economy slowed last summer.

“We had been looking for the bank to wait until their July meeting before restarting the rate-hike process … but if there is a surprise to our rate call, it now looks like the bank would go earlier, rather than wait longer,” Porter said.

The flashing red light confronting Carney is that any rate increases while the U.S. Federal Reserves stays on the sidelines will likely light a fire under the already hot loonie. And that could snuff out the strongest performer in the economy —exports to countries with falling currencies like the United States.

The dollar has traded over par with the greenback almost constantly since the beginning of 2011 and got another boost Monday from the GDP data. It closed Monday at 102.94 cents US, up about three-quarters of a cent and the highest since mid-November 2007.

Carney’s reaction to the strong numbers will be known Tuesday morning when the bank delivers a short analysis along with its decision on interest rates. Economists and the markets expect the central bank to keep its trendsetting overnight rate at one per cent. Of interest is whether Tuesday’s bank statement includes a rosier economic outlook and a hint of when rates will start rising.

Monday’s output data was also good news for the federal government as nominal growth — which is most directly tied to tax revenues, particularly on the corporate side — jumped by 7.2 per cent on the wealth effects of high commodity prices. Wages and salaries, which also impact government revenues, grew a strong 5.7 per cent in the quarter.

While encouraging, TD Bank chief economist Craig Alexander said he doubted that the momentum could be sustained for long.

“I think the 4.9 per cent growth in consumer spending was the last gasp before moderation, and I also believe export growth is not going to be as strong,” Alexander explained. “If you take the third and fourth quarter and average them together, you get about two-and-a-half (per cent), and that’s what we expect in 2011 for the year. That’s a decent pace of growth.”

There were some downside surprises in Monday’s data as well. Inventory buildup fell, unusual during a recovery, and business investment in new machinery and equipment was basically flat, although the previous three quarters had been strong.