Canada First Mortgage

William Watson, Financial Post

Seventy-five years ago Thursday the newly constituted Bank of Canada took over responsibility for Canada’s currency. It was supposed to have done so 10 days earlier but British American Bank Note Co. was late with its initial delivery of cash.

Since 1935, when the Bank came into being, prices in Canada have risen 16-fold. What costs $100 now would have cost just $6.25 then. It makes you wish the banknotes had been delayed a lot longer.

Those numbers, by the way, are from the very handy inflation calculator on the Bank of Canada’s website. You don’t really want your central bank to be good at tracking inflation. You want it to be good at crushing it. The bank took about 50 years to catch on, but it’s now reasonably good at what it’s supposed to do.

To be fair, in evaluating its performance the important question is “compared to what?” Until 1935, money matters were handled by the currency branch of the Department of Finance, which handed out “Dominion notes” in exchange for gold, and vice versa, and occasionally encouraged the private banks to take on more liquidity by lending them notes against financial securities, though charging them interest of 5% for the privilege. Many banks also issued their own notes, which caused problems when the public lost confidence in a given bank.

During the Depression, elite opinion became convinced that Finance should give responsibility for money and monetary policy over to a more expert and independent central bank of the sort most other countries now had, the United States since 1913.

On July 31, 1933, Prime Minister R. B. Bennett empanelled a five-person Royal Commission-two Brits, including its chair, Lord Macmillan, two bankers and the premier of Alberta. It held its first meeting eight days later and reported 50 days after that. In a 3-2 split, with a majority of the Canadians and, politically conveniently, both bankers opposed, it recommended the institution of a privately-owned central bank. (Mackenzie King was to nationalize it in 1938.)

Just a year and two days after the commission’s appointment Parliament approved the Bank of Canada Act. There was no national productivity problem then: things got done. Two months later Prime Minister Bennett named the first Governor, Graham Towers, assistant to the general manager of the Royal Bank and a Montrealer trained in economics at McGill by none other than Stephen Leacock and seven months after that the Bank made its first transactions.

In the crisis of the last two years the Bank has ventured into what it sees as unorthodox areas of lending and investment. But it began in unorthodoxy. In 1936 it bailed out Alberta and Saskatchewan when they threatened to (and in Alberta’s case eventually did) default on their bonds. In 1938 Governor Towers took charge of the newly-created Central Mortgage Bank, which was designed to help struggling mortgage-holders. During the war the Bank supervised exchange controls and Towers did secret planning for how to keep finance going if the Nazis over-ran Britain. (Make the Canadian dollar the Empire’s new reserve currency was one possibility).

The worst inflations of our central bank era occurred in the late 1940s and the 1970s. In both cases it’s easy to sympathize with the governor of the day. During the war, Canadians lent their government hundreds of millions of dollars in Victory Bonds. Most such bonds paid 3% or less. Had the Bank done what it probably should have and raised interest rates to stem the postwar boom, the value of all those bonds would have crashed: If new bonds pay 6% what are old bonds that pay 3%? Half their original value. Towers, who had run several Victory Bond campaigns, felt a moral obligation not to destroy bond-holders’ savings. Ironically, the inflation that resulted may have induced him to leave the Bank. In 1935 his salary had been a majestic $30,000 a year. By 1955, when he quit, it was $50,000 but only $25,641 in inflation-adjusted 1935 dollars. And taxes were a lot higher.

The inflation of the 1970s is also understandable. Keynesian textbooks didn’t say what a central bank was supposed to do when a cartel jacked up the price of oil by several hundred percent. The stagflation that followed stumped policymakers. Milton Friedman’s monetarism did have a theoretical answer: keep the growth of money low and constant and inflation will be low and constant. Send a steady flow of liquidity into one end of the hose that is the economy and you’ll get a steady flow of real economic activity out the other end. It’s certainly plausible. But when Bank Governor Gerald Bouey tried it in the late 1970s it didn’t work. The hose turned out to be unpredictably elastic. Sometimes it sucked up liquidity and produced no growth. Other times just a little liquidity brought gushing growth.

Not until the late 1980s and the governorship of the, at the time, much disliked Governor John Crow, did the Bank start directly targeting inflation with a clearly defined “reaction function” (if inflation does X, we do Y: everybody got it?).

That strategy worked pretty well for two decades. Between 1990 and 2010 prices increased by only 50%. That’s not fantastic but no 20 years since 1935 have been better.

After three score years and 15 the Bank seems finally to have figured things out. Let’s all tip our hats to R. B. Bennett.

Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2667790#ixzz0hs4Ni6CN

By Luann Lasalle, The Canadian Press

MONTREAL - Younger Canadians are expected to lead the way with home buying this year as they take advantage of low interest rates, new jobs and what they consider “good prices,” a bank survey says.

The survey for the Royal Bank suggested that 15 per cent of Canadians between the ages of 18 and 24 were very likely to buy, almost double from eight per cent in 2009.

It’s a marked shift in the attitudes of younger Canadians, who have tightened their budgets over the past few years to cope with tough jobs markets and the recession.

“Our poll found that 35 per cent of younger Canadians, between the ages of 18 and 24, are intending to buy a home due to good real estate prices,” Marcia Moffat, RBC’s head of home equity financing in Toronto, said Monday.

The national average price for a home was $328,537 in January, according to the Canadian Real Estate Association.

Thirty-one per cent of 18 to 24-year-olds surveyed in the online poll said they would buy a house because of a new job. The survey also found 22 per cent in that young age group wanted to buy a home because they considered interest rates were good.

CIBC World Markets senior economist Benjamin Tal said more young people are getting into the real estate market, taking advantage of low interest rates, lower down payments and more years to pay off their mortgages.

Tal said he estimates the young people getting into the market as a bit older, between the ages of 22 and 28.

“Basically parents are begging their kids to buy now because they remember when they were paying 12 to 15 per cent mortgage interest,” Tal said.

“So there’s a sense of urgency to get into the market and young people are a part of it.”

Tal described the coming real estate market of the next three or four years as “boring.”

“I think that what we are doing now is that we are basically stealing activity from the future.”

The RBC survey also suggested that overall attitudes are changing as more Canadians return to shopping for homes as the economy recovers, even though it’s considered a seller’s market.

“Confidence in the housing market is back, essentially,” RBC senior economist Robert Hogue said.

Royal Bank said the study found more Canadians are “very likely” to buy a new home in the next two years.

Ten per cent of the 2,047 people of all ages surveyed for the study said they planned to buy a home within two years - up from seven per cent two years ago.

The RBC study also found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years.

“At this stage last year, there was doom and gloom all around and it definitely affected the housing market,” Hogue said.

One-quarter of those surveyed, 26 per cent, said they expect their home to be their primary source of income when they retire.

However, the surge in optimism doesn’t necessarily mean that Canadians have forgotten about past economic troubles.

The survey found they are still more cautious when it comes to mortgages. Forty-four per cent of those surveyed who plan to buy a home in the next two years said they would take a fixed-rate mortgage.

Also on Monday, the latest new homes numbers showed that the annual rate of housing starts were up in February.

The Canada Mortgage and Housing Corp. said that the seasonally adjusted annual rate of housing starts reached 196,700 units in February, an increase from 185,400 in January 2010.

Senior CMHC economist Bill Clark said the market is seeing a lot of “catch-up” and consumers in Ontario and B.C. are likely trying to avoid the harmonized sales tax before the summer.

“So if you roll all of that together it’s really sort of one big recipe for housing starts to go up,” Clark said.

The report showed the gain was concentrated in the multiple starts segment, particularly in Toronto.

Urban starts increased nine per cent to 179,100 units in February.

Urban multiple starts increased by 19.1 per cent to 89,900 units, while single urban starts increased by 0.5 per cent to 89,200 units.

The annual rate of urban starts increased 28.6 per cent in Ontario in February, 14.3 per cent in Atlantic Canada, 10.8 per cent in the Prairies and by eight per cent in British Columbia.

In Quebec, urban starts fell 14.1 per cent.

Rural starts were estimated at a seasonally adjusted annual rate of 17,600 units in February.

Vast majority of Canadians view buying a home as a good investment

TORONTO, March 8 /CNW/ - Homebuying momentum in Canada continues to gain steam with the portion of Canadians who are very likely to purchase a home in the next two years rising to 10 per cent from seven per cent two years ago, according to the 17th Annual RBC Homeownership Study. Younger Canadians, aged 18 to 24, will lead the charge this year, with those very likely to buy almost doubling to 15 per cent from eight per cent in 2009.

The RBC study conducted by Ipsos Reid found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years, and one-quarter (26 per cent) expect their home to be their primary source of income when they retire.

“With the Canadian housing market showing continued vigour, it’s not surprising that Canadians feel more confident in the long-term value of owning a home,” said Robert Hogue, senior economist, RBC. “Exceptionally low mortgage rates and improved affordability have been key reasons for the resurgence in the housing market this past year.”

Most Canadians who intend to buy a new home in the next two years are planning to take a fixed rate mortgage (44 per cent). However, combination mortgages had the highest increase in popularity this year, with 40 per cent intending to take both a variable and fixed rate component, up from 32 per cent last year.

For Canadians planning to take a fixed rate or combination mortgage, seven-in-10 intend to take a term of five years or longer. Sixteen per cent said they intend to take a variable rate mortgage, down from 20 per cent in 2009.

“Canadians seem to be opting for more caution this year and may be factoring in potential rate increases down the road,” said Marcia Moffat, RBC’s head of home equity financing. “Choosing a combination mortgage can take some of the guesswork out of making a decision between whether it is better to lock in to a longer-term or stay in a variable rate.”

In the wake of the recent housing rebound, most Canadians (six-in-10) also believe housing prices will rise in 2010, up significantly from 25 per cent in 2009. Similarly, a majority (64 per cent) believe mortgage rates will be higher over the next year, also up from 33 per cent a year ago.

“The expectation of higher mortgage rates on the horizon could be motivating buying intentions this year. But it’s important that homeowners - especially first time buyers - get solid advice about what they can afford, not only today, but down the road,” added Moffat.

In addition to seeking customized advice from a financial advisor, Moffat provides the following tips:

For homebuyers:

1. Lock in your rate when you apply for your mortgage.

Depending on your situation, there are rate guarantees that allow you to lock in your mortgage rate for up to 120 days.

2. “Stress test” your mortgage for rate increases.

If you are concerned about affordability down the road, knowing what your payments would be with a one - three per cent rate increase will give you greater peace of mind that your new home is affordable both today and in a few years time, when rates might be higher.

3. For first time homebuyers, leave some wiggle room.

With a pre-approved mortgage you will know what you can afford today. But before making a decision to find a home at the top of your pre-approval amount, also consider your current lifestyle preferences and how future changes in your circumstances could impact your payment comfort zone.

For homeowners renewing their mortgage:

1. Take advantage of early renewal options.

Some mortgages allow you to renew up to 120 days before the end of your term. This means you can lock in your new mortgage rate early.

2. Consider a combination (hybrid) mortgage to manage your interest costs.

If you are unsure of where rates are headed, consider splitting your mortgage into part fixed and part variable. You will have rate protection on the fixed rate mortgage portion, while you benefit from today’s low interest rates on the variable rate mortgage portion. Transmitted by CNW Group

CALGARY - The local housing market showed signs of balance, not a bubble, in February, according to the Calgary Real Estate Board.

In releasing its official MLS numbers for the month, the board said sales and average prices increased in both the single-family home and condominium markets compared with year-ago levels.

“We’re just pretty steady and we’re getting some momentum, but that’s fairly typical in a normal year and I don’t even compare it to last year because last year wasn’t a normal year,” said board president Diane Scott.

“Right now, where we sit in February, it’s pretty stable. It’s a comfortable market and we’re almost close to equal buyers and sellers.”

Single-family home sales for February were 1,035 units, up 25.5 per cent from February 2009’s 825 units. The average sale price hit $458,254, an increase of 10.3 per cent from last year’s $415,568.

Also, condo sales were up a whopping 56.3 per cent to 536 units compared with 343 sales in February 2009. The average price also increased by 5.2 per cent, to $282,880 from $268,971.

Richard Cho, senior market analyst in Calgary for Canada Mortgage and Housing Corp., said market watchers have to be careful when comparing February numbers with a year ago.

“In many ways it would be like comparing apples to oranges,” Cho said.

“Market conditions now are stronger compared to this time last year, when conditions were more uncertain. We are still seeing steady demand for homes, especially for the entry-level product. Low mortgage rates continue to support demand for home ownership.

“The selection of homes for prospective buyers has also improved, with active listings trending up. The resale market has settled into balanced conditions, putting modest pressure on prices.”

A year ago, Cho said, people were losing their jobs. They were waiting on the sidelines to see where the economy was going and where house prices were headed.

Now, with things improving and the economy and housing market stabilizing, prospective buyers are more comfortable with making larger purchases such as homes, added Cho.

Scott agreed the economic situation last year had an impact.

“We were in such a slump and there was no consumer confidence,” she said. “It looked like we were going downhill for a long period of time.

“This year, the consumer confidence is up, the interest rates are low still and hopefully that will stay for a little while longer and afford-ability is there. A lot of people who were sitting on the fence last year are coming off.”

She said the Calgary housing market has shifted from fragile to fervent in just over 12 months. The city is also seeing a moderate rise in the number of competing offers on homes.

For towns just outside Calgary, sales were up 55.8 per cent to 335 units from 215 a year ago but the average sale price dropped by 4.82 per cent to $353,912 from $371,829.

In the country residential market, which includes acreages, sales increased by 84.38 per cent, going from 32 last year to 59 last month, with the average price remaining virtually the same at $748,506.

Scott said many first-time buyers are seeing this as the time to take advantage of record-low interest rates.

“We will see a rise in both our inventory and demand this spring — and we expect both to stay in a healthy balance. Prices will edge up as the year progresses, but the rise in prices will be moderate,” added Scott.

Single-family listings in Calgary added for the month of February totalled 2,154, a 4.72 per cent jump from a year ago.

New listings for condominiums for February were 1,109, up 24.3 per cent from last year.

“The story of the housing market is all about interest rates at the moment,” said Scott. “When the rates will rise is the wild card. Canada’s economic recovery showed marked improvement in the final quarter of last year. This will put pressure on the Bank of Canada to begin raising rates sooner than planned to curb inflation.”

mtoneguzzi@theherald.canwest.com

Read more: http://www.calgaryherald.com/business/real-estate/Home+sales+prices+rise+Calgary/2628710/story.html#ixzz0hE1IqYgn

By Julian Beltrame, The Canadian Press

OTTAWA - The Bank of Canada is keeping interest rates at historic lows for a few more months, while sending out signals that the economy is rebounding strongly and could trigger inflationary pressures.

The central bank’s more positive take on the economy followed a Statistics Canada report Monday of a surprising five per cent growth spurt in the fourth quarter of 2009 and sent a strong loonie even higher.

“The level of economic activity in Canada has been slightly higher than the bank had projected in January,” the bank said Tuesday morning before markets opened.

“The economy grew at an annual rate of five per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports.”

“Slightly higher” may be an understatement, as the bank had projected growth of only 3.3 per cent for the last three months of 2009.

The bank also noted that “core inflation” has been slightly firmer than projected, although it added that some of the price increases were due to transitory factors.

The governing council continued to reiterate that despite the improved conditions, they would likely leave the overnight rate where it has been since last spring - at 0.25 per cent - until at least July.

But some economists weren’t buying it and the reaction of money markets suggested that there may be some pressure on governor Mark Carney to move on interest rates ahead of schedule.

“They are getting ready to take away the punch bowl,” said Derek Holt, vice-president of economics with Scotia Capital.

“I think they are priming the markets for a second-quarter hike.”

The next interest rate announcement comes in April, but June would be a more likely time to move, said Holt, if indeed the bank is preparing to act.http://ca.news.finance.yahoo.com/s/02032010/2/biz-finance-economy-improving-interest-rates-stay-historic-lows.html

Paul Vieira, Financial Post

OTTAWA — With Bay Street convinced the Bank of Canada will maintain its pledge to wait until July to begin raising interest rates, the debate now turns to how aggressively the central bank should behave thereafter.

In the view of a paper prepared for the C.D. Howe Institute, the central bank should act with zeal. If it wants to get ahead of the inflation curve, the bank should raise its benchmark rate by 50 basis points at every scheduled rate announcement until the middle of next year, the paper said.

Michael Parkin, an economics professor at the University of Western Ontario and member of the think-tank’s monetary policy council, said “steep” increases would be required to make up for keeping the benchmark rate so low for so long.

The paper comes a week before the Bank of Canada’s next interest-rate statement, scheduled for March 2 and the same day Mark Carney, the bank governor, held an annual meeting with leading private-sector economists in Ottawa.

The bank cut its benchmark rate last year to a record low 0.25%, and made a pledge — conditional on inflation — to keep it there until the end of June in an effort to pump up the economy amid the financial crisis. Analysts say the move has worked. Figures on gross domestic product, to be reported next week, should indicate the economy grew roughly 4% in the fourth quarter, above the central bank’s own expectations. And inflation is closer to the bank’s 2% target earlier than envisaged, although analysts suggest price increases could lose some steam in the weeks ahead.

The main thrust of Mr. Parkin’s argument is the central bank needs to raise rates as aggressively in anticipation of the recovery as cut in response to the financial crisis. This would be in line with the Taylor rule, which dictates by how much a central bank should move its benchmark rate in response to inflation.

Based on the central bank’s own economic projections, Mr. Parkin calculated the future path of interest rates. “When the [benchmark] rate starts to rise, it must be on a steep upward path,” he wrote. Under the Taylor rule the benchmark rate should in fact, be higher than present levels. As a result, a target rate “somewhat higher” than what otherwise would be required might be necessary for the latter half of this year and all of next, he said, “to avoid inflation running above target.”

Economists indicate the central bank, if possible, will keep its pledge because reversing course now could damage its credibility.

Other analysts also signalled that they shared some of Mr. Parkin’s view.

“In order to move from an exceptionally low to low-rate environment, you need to move fast,” said Sébastien Lavoie, economist at Laurentian Bank Securities, which last fall indicated in a report Mr. Carney would need to entertain rate increases of up to a percentage point.

Michael Gregory, senior economist at BMO Capital Markets, said that by mid-2011 the benchmark rate would “have to be in proximity of being neutral.”

However, he added the central bank would have to take into account the strength of the loonie in determining the appropriate level of interest rates. The currency is likely to climb as the Bank of Canada moves ahead of the U.S. Federal Reserve, and perhaps more aggressively, Mr. Gregory said. http://www.financialpost.com/news-sectors/economy/story.html?id=2602124

By Paul Vieira, Financial Post

OTTAWA — Amid warnings about Canadian household debt levels and a possible housing bubble, Finance Minister Jim Flaherty said Tuesday the federal government would make it tougher for people to get a mortgage.

He said at an early Tuesday morning media conference that Ottawa would require all borrowers meet standards for a five-year fixed-rate mortgage, even if the buyer wants a variable rate mortgage. That is the key move announced Tuesday. Other rule changes unveiled would affect people looking to refinance their mortgages — lowering the maximum amount that can be withdrawn to 90 per cent from 95 per cent — and place a 20 per cent minimum down payment for government-backed mortgage insurance on non-owner-occupied properties.

But the Minister said the changes were not meant to stop a possible housing bubble, as some warned was upon us.

“There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one,” Flaherty said. “Our government is acting to help prevent Canadian households from getting overextended.”

The decision to adopt new mortgage rules emerged after nearly a week of dire warnings from prominent Canadians — such as money manager Stephen Jarislowsky and former Bank of Canada governor David Dodge — that the housing market was on the verge of possible trouble, as price increases were not sustainable and present mortgage rules were too lax.

The Department of Finance in 2008 said Canada Mortgage and Housing Corp. would limit amortizations to 35 years and offer loan insurance on only 95 per cent of the loan value. The government’s housing agency had offered mortgage insurance on loans worth as much as 100 per cent of the home value and amortization periods of as many as 40 years since 2006.

Canadian home prices and resales will grow to records this year, boosted by low interest rates, the Canadian Real Estate Association said in a report last week. Canadian new-home prices rose 0.4 per cent in December from November, the sixth straight gain, according to government figures.

As recently as two weeks ago Flaherty said there was “no substantial concern” about the emergence of a housing bubble after meeting with private-sector economists. And in an interview with the Financial Post in late December, he said there was “no evidence” of asset bubble in real estate.

The following article is courtesy of Merix Financial…

Canadian real estate sales and prices are poised to set records this year, according to a new forecast that is bound to reignite calls in some quarters for tighter lending rules.

The Canadian Real Estate Association, which represents 100 boards across the country, said Monday it expects existing-home sales to reach 527,300, a 13.3% increase from a year ago and a 1.2% increase from the record high set in 2007.

The new-home market appears to be picking up steam, too. Canada Mortgage and Housing Corp. said there were 186,300 starts in January on a seasonally adjusted annualized basis, the highest level of new construction since October 2008.

Bank of Canada governor Mark Carney has warned about rising levels of household debt, which is reaching record levels. Finance Minister Jim Flaherty has suggested he is prepared to tighten mortgage requirements and continues to monitor the market.

“One of the legitimate concerns of the Finance Minister might be if you make qualifying for mortgage default insurance prematurely restrictive that it will quell housing activity even as erosion in affordability continues,” said Gregory Klump, chief economist with CREA.

There are have been some rumblings that the government is considering new rules that would require buyers who need mortgage insurance to have at least 10% down and amortize their mortgage over just 25 years instead of the current 35 years.

Anybody with less than a 20% downpayment must get mortgage insurance, if they are borrowing from a financial institution governed by the Bank Act.

Mr. Klump’s group contends the market is going to correct on its own in the second half of 2010. CREA has called for sales to drop 7.1% in 2011. The group says that while prices will rise by 5.4% in 2010, to a record high of $337,500, they will drop by 1.5% in 2011.

That view of the housing market is not out of step with some economists, who say that once interest rates rise and inventory levels increase, price increases will shrink. Year-over-year price increases in some markets, such as Toronto, have been around 20% for the past few months.

“There is still a sense of urgency to get into the market. The market will continue to be strong over the next few months,” said Benjamin Tal, senior economist with CIBC World Markets, adding he could see new construction also touching 200,000 starts before beginning to fall.

Part of that urgency in the housing sector is being driven by the introduction of the harmonized sales tax in Ontario and British Columbia on July 1. The tax would apply to real estate services and could increase the cost of buying a home by a few thousand dollars.

“It’s a factor fuelling a higher level of activity in Ontario and British Columbia,” Mr. Klump said. “What’s more Canadian than avoiding taxes?”

Elton Ash, vice-president of Re/Max of Western Canada, said he thinks the forecast put out Monday was a little optimistic for 2010, specifically the 4.2% price increase for British Columbia. “But I also think the market will be better in 2011 [than CREA].”

Mr. Ash is actually in favour of some measures to cool the market, like reducing the amortization period back to 25 years. But he wonders whether increasing the downpayment will take some people out of the housing market.

“I think leaving it at 5% would be okay,” Mr. Ash said.

Garry Marr, Financial Post 

Shannon Puddister figured he would probably need some flexibility when he took on his first mortgage, with an 18-month-old daughter already in tow and another child on the way.

The 32-year-old Toronto-based commercial litigation lawyer with Lerners LLP, bought his first home last year with his wife Deanna Webb. To deal with the financial strain of two children, they chose to amortize their mortgage payments over 30 years.

His payback plan should come as no surprise. For generations, Canadians have gone for 25-year amortizations but according to the Canadian Association of Accredited Mortgage Professionals, almost half of new borrowers now opt for a longer amortization.

“When we put together our budget, we looked at it as a cash flow issue. A longer amortization rate means a lower payment. I know that means you are paying more interest but from our perspective, entry level buyers with a kid, our plan was to get ourselves settled, push through with a first mortgage and, when we renewed our mortgage, shoot for a lower amortization,” said Mr. Puddister, whose wife gave birth to their second child this month.

Just 15 months ago, he could have opted for a 40-year amortization but Ottawa cracked down on those lengths and set the limit at 35 years. The government also demanded consumers have a 5% downpayment.

Last month Finance Minister Jim Flaherty seemed to renew debate on the subject, when questioned by reporters about the booming housing market that has rebounded sharply from lows reached in January.

“Well, we have to watch and we are watching and monitoring. As you know, we took steps a year or two ago to require at least a 5% down payment and to restrict the amortization period for insured mortgages but we’re watching that. Low interest rates obviously are having an effect on the strength of the housing market in Canada,” he said, warning “people have to make sure that the mortgages they take out today either have a fixed rate or they know that they’ll be able to handle increases in that mortgage rate later on.”

In his case, Mr. Puddister says there is no question a larger downpayment or shorter amortization requirement would have changed his buying decision dramatically. The other problem is today’s rates are so low, he can’t see himself trying to pay down his mortgage principal any faster.

“I’d rather dump it into an investment,” says Mr. Puddister, who is borrowing at about 2.25% based on today’s rates.

While Mr. Puddister may have the financial discipline to save and invest the money he is saving from low interest rates, mortgage broker Vince Gaetano says he is the exception.

“Only abut 5% of people take advantage of pre-payment privileges,” says Mr. Gaetano, adding once a consumer gets used to low monthly rate, they are loath to increase the payment even if it means knocking down principal faster.

“You get a mortgage for five years and then don’t think about it. Are you going to start making payments or are you going to take your vacation? I don’t think it would be so bad to take the maximum amortization down to 25 years because that way you would have some buffer room for making sure people qualify.”

CIBC World Markets senior economist Benjamin Tal says the bigger issue for consumers would probably be an increase in downpayment as opposed to a change to amortization schedules. Even though half of mortgage origination is said to be going for a longer amortization, Mr. Tal issued his own report that shows 40% of Canadians opt to make an extra month’s worth of payments each year.

Called accelerated bi-weekly payments, consumer make payments every two weeks instead of twice a month and the impact is considerable. “On a $250,00 mortgage with 5% rate amortized over 30 years, that works out to a de facto shortening of the amortization period by five years,” says Mr. Tal, adding if rates rose by 75 basis points, consumers could absorb the increase by simply stopping the accelerated payments.

Mortgage credit was up about 7% year over year when Mr. Tal wrote his report but he thinks dramatic changes to downpayment levels and amortization are not necessary at this point. “Be careful you don’t kill a fly with a hammer. You could derail the housing market for no good reason,” says Mr. Tal.

In real estate circles, many privately grouse about Mr. Flaherty’s overreaction to an improved housing market that still fell well short of records set in 2007. “You don’t want to see anything that affects the ability to purchase,” says Gary Friend, president of Canadian Home Builders’ Association. “You make changes and in a place like Vancouver where I am, it could have a significant effect. At the same time we respect the need for prudent credit conditions and smart borrowing.”

Low rates, low downpayments and long amortizations have made it easy for just about anybody to buy a home, says Ron Cirotto, who runs the website amortization.com. He sometimes wonders why everybody feels they must buy.

“What they’ve done with mortgages, it’s almost like the concept we had when I was coaching hockey. At one point it seemed like everybody got a trophy. The finalist, the semi-finalist. Everybody has to be winner, everybody has to have house even if they can’t afford it.”

Posted: February 01, 2010, 7:44 PM by Pamela Heaven

While Canada’s ability to sidestep the banking crisis has earned a slow drip of respect from the rest of world over the past year and half, it turned into a flood over the weekend.

On Monday, the most e-mailed story on the entire New York Times website was an economist advocating that the United States emulate Canada’s financial regulatory regime. It helps that the economist/columnist was Paul Krugman, Nobel prize winner and one of the most ardent critics of the way the U.S. government bailed out its big banks.

Mr. Krugman concludes that the U.S. will likely do very little to fix its banking system but “it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door.”

He writes that Canada was better at protecting consumers from predatory lending and that may, along with our supposedly more conservative nature,  be a big contributor to our financial stability.

In the Financial Times, Chrystia Freeland, the paper’s U.S. managing editor, hit on some of the same points as Mr. Krugman including repeating the commonly held assumption that we are too collectively dull as a nation to even create a bubble worth bursting.

Ms. Freeland, a Canadian, does add more depth than Mr. Krugman and actually talks to many of the leaders of Canada’s financial system. She runs through several of the possible reasons for our good fortune: a more prudent culture, better rules, regulators that talk to each other and a cozy, conservative mortgage market.
All of these topics have been covered extensively by reporters like John Greenwood, Paul Vieira and Theresa Tedesco in the Financial Post, but it’s nice to see two other prominent papers taking notice.
Grant Ellis, associate editor, Financial Post