“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 percent inflation target,” it stated. “Such reduction would need to be carefully considered.

It did not say whether “eventually” meant the next rate increase would be in July, September or beyond, but its statement was more hawkish than previous ones, which only said that any future hikes “would need to be carefully considered.”

The central bank now sees underlying inflation as only “relatively subdued” rather than “subdued” as in previous statements, but it did not change its overall outlook for inflation. It repeated that the persistent strength of the Canadian dollar “could create even greater headwinds for the Canadian economy” and dampen inflation.

Temporary supply chain disruptions from Japan will sharply restrain growth in the second quarter but this should be unwound afterward, it said.

It said the U.S. economy continued to grow modestly and European growth was maintaining momentum, but it said risks to peripheral European economies had increased.

The central bank became the first in the Group of Seven advanced economies to tighten monetary policy following the global financial crisis, hiking three times from June-September last year but pausing since then due to the weak global recovery.

There has been no consensus among market players on when the bank would resume the tightening cycle but July had recently been ruled out by most as a possibility.

Three of Canada’s largest commercial banks pushed back their rate hike expectations to September from July over the past two weeks.

Thirty-five of 43 forecasters surveyed by Reuters last week predicted the next rate hike would be in the third quarter, implying a move in either July or September, or both.

Overnight index swaps, which trade based on expectations for the key central bank policy rate, showed investors slightly reducing the likelihood of a rate hike in July, but increasing the odds of tightening in September, October and December.

Swaps showed markets see a 94.3 probability the central bank will keep its benchmark rate on hold in July, up from 93.56 percent just before the rate decision.

There is hope that April will finish with a bang, though. “Sales activity was quite strong during the first two weeks of April. If this level of activity is sustained for the remainder of the month, we could see April transactions close to last year’s record result. Positive economic news has kept households confident in their ability to purchase and pay for a home over the long term,” said TREB President Bill Johnston.
While listings and sales numbers have dropped, average prices have increased. According to TREB’s report the average selling price for firm deals reported through the first two weeks of April was $483,165; this signals a 12 % increase over the average price of $430,271 year-over -year.

“The number of homes listed for sale so far in 2011 has been below expectations. Market conditions have tightened, resulting in increased competition between home buyers and accelerating rates of average price growth,” said Jason Mercer, TREB’s Senior Manager of Market Analysis.

There is incentive to jump into the market now, and they are banking on the lure of price appreciation to bring more sellers to market: “The strong rate of price growth reported for the first two weeks of April should entice more households to list their homes for sale. This would result in more balanced market conditions and more moderate rates of price growth,” continued Mercer.

These costs are among the highest in North America. For example, development charges on comparable housing in other jurisdictions are: $23,418 on average in the Greater Vancouver Area; $7,475 in Calgary; and $1,425 in Edmonton; In the U.S., the national average is $8,328 with the two highest state averages being California at $21,648 and Florida at $8,974.

Similar increases are evident in new high rise construction. In addition to development charges, other government-imposed costs on housing include sales taxes, land transfer taxes, application and processing fees, building permit fees, new home warranty fees, land dedications, and a multitude of other revenue-generating mechanisms for government. While many of these charges are levied on the construction industry, the costs are passed onto homebuyers in the form of higher housing prices.

Government-imposed costs on housing have doubled, and in some cases tripled, over the last decade. The reason? Faced with mounting fiscal pressures, governments have increasingly looked to housing for additional revenue because often these charges are not transparent to consumers, unlike property tax increases.

But this approach is short-sighted as it has serious negative consequences:
• As house prices escalate, home ownership moves beyond the reach of an increasing number of lower and moderate income families.
• A lack of affordable housing leads to a lack of an available nearby workforce to attract employers, which in turn works against the planning objectives to have a balance of jobs and housing within a community.
• Development charges are applied on a per unit basis. Consequently higher density development pays a higher charge per hectare than low density development. This works at cross purposes to land use policies aimed at intensification
• Higher prices slow demand, reduce employment within the construction industry and suppliers. The Dunning study estimates that if house prices in the GTA could be reduced by 10%, annual housing starts would increase by 4,500 to 4,750 dwelling units. This would create 7,400 new jobs.

“We understand that government must be able to fund the infrastructure investments, but this should not be at the expense of housing affordability,” says Richard Lyall, President of RESCON. “Governments should conduct a cost-benefit analysis each time another housing charge is proposed.”

Andy Manahan, Executive Director of RCCAO, says the dramatic increases in fees, charges and regulatory costs are unsustainable and penalize working families. “Governments should consider alternative funding mechanisms that will help alleviate the upward pressure on new home prices.”

The two studies released are:
Consequences of Government-Imposed Costs Within the New Housing Market, written by Will Dunning, prepared for the Residential Construction Council of Ontario (RESCON).
Alternatives to Development Charges for Growth-Related Capital Costs, written by David Amborski, prepared for the Residential and Civil Construction Alliance of Ontario (RCCAO).
Both studies are available at either www.rescon.ws or www.rccao.com.

It is widely believed mortgage rates will rise in the second half of 2011. Trends in the housing market continue to be driven by the lingering after-effects of the recession, said Phil Soper, president and chief executive of Royal LePage Real Estate Services, in a press release. Canadians realize that interest rates are unsustainably low and that homes will become effectively more expensive when mortgage rates return to normal levels. We will likely see more price appreciation early in 2011 as some buyers complete transactions in advance of anticipated higher borrowing costs.

Highlights from some key markets were as follows:

* St. John’s, Newfoundland experienced strong year-over-year gains in all three housing types: detached bungalows, standard two-storey and standard condominium

* Montreal saw an 8.7 per cent year-over-year increase in detached bungalows and two-story homes, while condos jumped 11.3 per cent

* Ottawa’s housing prices rose between 6.3 and 10 per cent in all categories

* Toronto’s largest increase of 5.6 per cent came in for two-storey houses; but prices are expected to rise by only one per cent in 2011

* All housing categories in Winnipeg had strong increases with detached bungalows rising the most at 10.3 per cent

* Average home prices in Regina are predicted to increase by five per cent in 2011

* Calgary and Edmonton are both poised for house prices rising with an energy sector recovery

* Meanwhile Vancouver prices are also expected to rise by 3.7 per cent in 2011

Finance Minister Jim Flaherty announced Monday that new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 percent.

Secondly, Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 percent from 90 percent of the value of their homes.

Thirdly, Ottawa will withdraw government insurance backing on lines of credit secured by homes.

Though longer amortization periods reduce monthly payments, they greatly increase the amount of interest paid over the life of the mortgage and make it harder to build up equity.

The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 percent interest, and the minimum 5 percent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.

At a news conference in Ottawa, Flaherty said the measures will encourage Canadians to save more through home ownership. He said they will also reduce the exposure of Canadians to financial risks. Flaherty said his concern is not Canada’s mortgage default rate – which is less than 1 percent. Rather his concern is those who are borrowing as much as possible.

“We’re seeing people borrow to the max, and borrowing to the max at low interest rates,” he said. “Most Canadians are not doing that.”

Flaherty predicted the measures will have “some moderating” impact on the housing market.  He said the changes will not take effect immediately because of a requirement to give the industry 60 days notice before making policy changes of this nature. He said past experience suggests there is no need to fear a rush on 35-year mortgages before the new rules take effect.

In addition to cutting mortgage terms, Ottawa is taking action to reduce the rapid rise in home equity lines of credit, or HELOCs. The government will do this by clamping down on the insurance that Canada Mortgage and Housing Corp. offers to the lines of credit.

Home-equity lines of credit and loans have surged in Canada, rising at almost twice the pace of mortgages over the past decade to account now for 12 percent of overall household debt.

The third measure that will reduce how much Canadians can draw on their home equity. Last February the Finance Department announced that it would lower the maximum amount Canadians could withdraw in refinancing their mortgages to 90 percent from 95 percent of the value of their homes. It is now reducing that maximum to 85 percent from 90 percent.

Observers have been speculating that Finance Minister Jim Flaherty would take steps to tighten mortgage credit in the next federal budget. The timing of the move suggests concerns are growing in government circles about household debt and its impact on the economy.

CIBC chief economist Avery Shenfeld referred to the mortgage changes as part of a larger move by the government to “force Canadians on a debt diet” as household debt levels sit at record levels.

“Policy makers now have that credit build-up in their policy gun sights, and will use higher rates and regulatory changes to bring spending into better line with income, and cool mortgage demand,” Shenfeld wrote in an economic forecast on Monday.

“Canadians aren’t on the verge of a U.S.-style default crisis – not at these interest rates, and not with debt having been granted to stronger hands than was the case before America’s crisis, when subprime mortgages and credit cards were given out like candy,” he said.

“But maintain this diet of borrowing for five more years and debt obesity would indeed weigh down the household sector’s momentum. It’s time to start the borrowing diet now, and that means policies aimed at slower debt-financed consumption growth and a cooler housing market.”

Bank of Montreal’s head of Canadian retail banking supported the government’s move, since the bank has been primarily recommending mortgages with a maximum 25-year amortization to build more equity and retire the loan faster, rather than paying more interest.

“The actions announced today by Minister Flaherty are prudent, measured, responsible and timely,” Frank Techar, president of personal and commercial banking at BMO, said in a statement issued by the bank. “For many months, BMO has been encouraging Canadians to lower their total cost of household debt by paying down short-term higher interest debt and considering the benefits of a mortgage with a 25-year maximum amortization to help them save interest costs and pay down their mortgage faster.”

It’s not the first time the Conservative government has tinkered with the mortgage market. In 2008, Flaherty announced Ottawa would no longer back 40-year amortizations, with a goal of cooling down a hot real estate market and preventing the emergence of a housing bubble in Canada. At that time, the government said it would also back only mortgages where the buyer has put down at least 5 percent, effectively eliminating zero-down mortgages.

Last February the Finance Department lowered the maximum amount Canadians could withdraw in refinancing their mortgages to 90 percent from 95 percent of the value of their homes. Flaherty also introduced a measure requiring borrowers to qualify for a five-year fixed-rate mortgage, even if they sought a variable mortgage at a lower rate. Until that change, home buyers only had to qualify for the higher of either a three-year fixed-rate or variable-rate mortgage.

With files from Grant Robertson, Boyd Erman, Tara Perkins and Steve Ladurantaye

Bill Curry, The Globe and Mail

7:20 AM, E.T. | January 17, 2011

Canadian, Economy, Real Estate