Ottawa changes GST rules, setting up finance battle

Tara Perkins

From Friday's Globe and Mail

Ottawa has quietly moved to tax some financial services, setting up a fight the sector says will cost more than $1-billion a year.

The government has changed the rules on a goods and services tax exemption in a way that the industry says applies GST for the first time to a number of financial services offered by, for example, mortgage brokers and insurance advisers. The industry says the costs will be passed on to consumers. Banks, insurers, mortgage and insurance brokers, and investment companies are urging the Finance Department to retract its amendments and hold broad consultations before going back to the drawing board.

At issue is the definition of “financial service” in the tax laws. Such services are generally exempt from GST but Ottawa has changed the definition so that many activities that “facilitate” or “prepare” financial services are now subject to tax. The industry says Ottawa hasn't clarified how broadly the rules will apply but it appears that many services offered by brokers and advisers are newly taxable, including, for example, trailer commissions paid to mutual fund dealers, commissions paid to a car dealer to arrange credit for a car buyer, and some work telemarketers do for insurers.

Mike Firth, a tax partner with PricewaterhouseCoopers, has written a paper for the CCH GST Monitor, a tax publication, in which he calls the situation a “ghastly mess.”

In an interview he said that Ottawa either made a “deliberate decision to extract billions more in revenue from the financial sector, presented as a ‘clarification,’ or the intention was much more limited but the combination of legislation drafted by the Finance Department and execution by the [Canada Revenue Agency] has mutated into a very radical policy shift. Neither possibility is very attractive.”

Ottawa issued a press release in December saying it was clarifying the rules, and the CRA followed up with a notice in February. Legal and accounting experts with financial services clients say that notice went far beyond what the sector was expecting and made a number of services that have been exempt from the GST since 1991 taxable.

A finance department official said Ottawa issued its release to address the uncertainty that some recent court cases created respecting the scope of the definition of “financial service” in the Excise Tax Act, and to “affirm the longstanding tax policy.”

“We are aware that some industry representatives have raised concerns,” the official said. “They have been invited to contact Finance and the CRA with further information, so that we have a better understanding of their concerns.”

The GST is currently 5 per cent but the relevant services would be charged 12 per cent and 13 per cent in British Columbia and Ontario respectively when they roll out the harmonized sales tax, said Barry Segal, a partner at Ogilvy Renault with concerned mutual fund industry clients.

“The big concern for our members would be it applying to commissions,” said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals. “There would probably be a significant net reduction in income to mortgage brokers.”

The Canadian Life and Health Insurance Association says the move could cost life insurers half a billion dollars a year.

For example, insurance advisers are paid commissions that could now be taxable, said Ron Sanderson, the CLHIA’s director of policy-holder taxation. “Ultimately these things are going to show up in customer costs.”

Joanne De Laurentiis, chief executive of the Investment Funds Institute of Canada, wrote to the Finance Department saying the amendments have created “tremendous concern” and asked for them to be withdrawn.

“During our consultations over the last several months, you have consistently indicated that policy changes to the GST regime will not be contemplated until after implementation of the newly harmonized regimes has occurred,” she wrote. “These announcements are a reversal of that position.”

Like many, Ms. De Laurentiis argued the announcements were not “clarifications” but “a significant policy change.”

IFIC has questions about how the GST and HST will now apply to commissions on buying and selling stocks and mutual funds, as well as redemption fees paid by investors.

Advocis, the financial advisers association, is concerned the moves will create an uneven playing field between financial products sold by commissioned-based financial advisers and products sold by banks using non-commissioned employees.

“The CRA notice amounts to an expansion of the GST tax base,” the group said in a bulletin.

Ottawa has said it plans to tackle the deficit without raising taxes.

There is fear that work will leave Canada as a result of this issue, Mr. Segal said. “A lot of the services that are provided, particularly many of the administrative services, are portable.”

Another problem is that the changes apply retroactively to Dec. 14, he said. “I know there is grave concern in the financial community about the operational complexity that this is going to cause. There may be GST or HST owing on transactions back to that date that hasn’t been collected.”

http://www.theglobeandmail.com/report-on-business/ottawa-changes-gst-rules-setting-up-finance-battle/article1512595/

Housing sales boom to continue: Scotiabank

Spurred by rising interest rates

Last Updated: Tuesday, March 23, 2010 | 1:59 PM ET Comments142Recommend53

CBC News

The prospect of rising interest rates will keep Canada's housing boom going this spring, a Scotiabank report predicted Tuesday.

The report predicted most regions of the country will remain sellers' markets for the first half of the year.

Scotiabank is predicting 510,000 home sales this year, up 10 per cent from 2009. (CBC)

"I think you're going to have a very active spring market, probably some cooling off in the second half of the year," Adrienne Warren, the Scotiabank economist who wrote the report, said in a presentation Tuesday.

"We're looking at once in a lifetime interest rates that people are taking advantage of … but certainly confidence is coming back, the job markets are stabilizing," she said.

Scotiabank predicted 510,000 home sales this year, up 10 per cent from 2009, but just shy of the 2007 record. It expected the average price will increase by about eight per cent to a record $345,000.

Housing starts, Scotiabank expected, will reach 190,000, up from 149,000 last year.

Warren said the spring rush will also be helped by an influx of buyers hoping to avoid tighter lending rules for mortgages and the introduction of the harmonized sales tax in Ontario and B.C.

Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.

With files from The Canadian Press

Read more: http://www.cbc.ca/money/story/2010/03/23/housing-boom.html?ref=rss#ixzz0j6MfqPBI

Canada's housing boom continues to outpace recovery in developed countries

By Sunny Freeman, The Canadian Press

TORONTO - Canada's housing boom will continue this spring as exceptionally low mortgage rates - and the expectation that borrowing costs will soon be headed higher - add a sense of urgency to consumer buying.

A Scotiabank global real estate trends report released Tuesday predicts most Canadian regions will remain sellers' markets for the first half of the year, as strong demand and rising prices continue.

"I think you're going to have a very active spring market, probably some cooling off in the second half of the year," Adrienne Warren, the Scotiabank economist who wrote the report said in a presentation Tuesday.

"We're looking at once in a lifetime interest rates that people are taking advantage of...but certainly confidence is coming back, the job markets are stabilizing," she said.

Scotiabank expects about 510,000 home sales this year, up ten per cent from 2009, but just shy of the 2007 record. Average prices are forecast to increase about eight per cent to a record $345,000, while housing starts are expected to reach 190,000, up from 149,000 last year.

The economic recovery from last year's painful recession has improved consumer confidence, although a bounceback in the jobs market is taking more time. Just over a third of the 417,000 jobs lost in the 2008-2009 recession have been replaced and the jobless rate is still at 8.2 per cent, only half a point below its high last August.

Most experts predict the rise in consumer confidence about the economy, and low interest rates, are behind the continued strength in the housing market.

Warren said the spring rush will be driven by an influx of buyers hoping to preempt tighter lending rules for mortgages and the introduction of the harmonized sales tax in Ontario and B.C. But a steady increase in the number of listings and a rise in construction are helping to restore a more balanced market.

"We're starting to see better balance, we're seeing more listings. There was a real lack of listings for the better part of last year...we're moving back into a better balanced situation," Warren said.

Warren said the hot spring market should give way to more subdued activity in the second half of the year, as higher interest rates and higher home prices erode affordability.

Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.

With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.

Warren added that the incentive for builders to add new houses to the market should also fade as supply increases and prices cool.

The front-loaded activity in the first half of the year will also contribute to lower sales, prices and construction in 2011, she said.

Canada's recovery continues to outpace developed countries around the world with housing prices in the fourth quarter up 19 per cent year over year. The strong performance has carried through into 2010, with sales in the first two months just slightly behind the near-record levels seen in late 2009.

Warren said that year-ago comparisons are amplified by the sharp drop in sales and prices at the end of 2008, but still represent a remarkable turnaround in a short time.

"We're not seeing a lot of evidence of speculative activity, I think you're just looking at a tight market, more buyers than sellers and people have to pay a premium in that environment,"she said.

She added that milder that usual temperatures across the country may have also put a bit of spring into a typically slow winter sales season.

Meanwhile, housing prices in countries including the U.K., Japan and the U.S. were still below year-earlier levels in the final quarter of 2009.

http://ca.news.finance.yahoo.com/s/23032010/2/biz-finance-canada-s-housing-boom-continues-outpace-recovery-developed.html

Fight over real estate fees not over

Michael Babad Globe and Mail

The fight over the Multiple Listing Service run by Canada's realtors isn't over yet. The Canadian Real Estate Association said today it approved changes that would give home buyers and sellers more power over their transactions on MLS. Under the change, a consumer will now be able to pay an agent a flat fee to list on the service, where about nine out of 10 of all deals are done. Agents must now pass along a seller's home phone number, if that's what the seller wants, to a potential buyer if asked. The association said in a statement that it believes it has now addressed the issues raised by the Competition Bureau, which has taken the issue to the Competition Tribunal.

But the Competition Bureau immediately responded that it plans to continue to challenge the “anti-competitive rules that deny consumer choice and stifle competition” despite the CREA changes.

“There is nothing in these proposals that we haven't seen before and they do not solve the problem,” Melanie Aitken, the Commissioner of Competition, said in a statement. “They are a step in the wrong direction. These amendments amount to a blank cheque allowing CREA and its members to create rules that could have even greater anti-competitive consequences.”

The bureau said CREA's amendments do not remove “existing roadblocks to real estate agents who list properties on the MLS from offering innovative services and pricing options to consumers.”

Canadians need to save more, Dodge warns

whether you agree with 70% or 50%, both views agree that Canadians need to save more for retirement. If YOU’re having trouble putting away those lump sums during RSP season, …why not put some aside by ensuring some of your compensation is paid in ongoing trailers by sending business to MERIX!

Generating 70% replacement ratio to retire at 65, requires 35 years of saving 10-20% of income

Jonathon Chevreau, Financial Post

Canadians hoping to "replace" 70% of their working income when retiring at 65 will need to save a "very high" portion of their annual pre-retirement earnings, says a C.D. Howe Institute study released today. Depending on their earned income while working, they will need to save between 10 and 21% of their pre-tax earnings every year: for 35 consecutive years between age 30 and 65, says the report, titled The Piggy Bank Index: Matching Canadians' Savings Rates to Their Retirement Dreams. The full 10-page e-brief can be found by clicking here. [If you have trouble with the link, as I did, copy it and paste it directly into your browser.]

Limits on tax-assisted savings prevent most high-earners from replacing 70% of working incomes

The authors -- David A. Dodge, Alexandre Laurin and Colin Busby -- say Canadians face obstacles in saving more. "The problem is that although private savings allow choice about retirement age and income, the Income Tax Act limits on tax-recognized savings may prevent many higher income earners from accumulating sufficient RRSP savings to securely replace 70% of their final earnings."

In a press release, former Governor of the Bank of Canada David Dodge [pictured above] said the findings provide "a ‘reality check' about the saving rates required to meet [Canadians'] retirement goals and inform the choices they could have to make between working longer or consuming less and saving more."

The authors assume a 3% real return on investments, despite the fact 4% is the historical norm. They assume inflation will average 2% a year and that public pensions like the CPP/QPP and Old Age Security will continue in their present form.

While a 70% replacement ratio is considered the "gold standard" an appendix provides calculations for more modest income replacement ratios of 60% and 50%.

Only "working poor" can get by saving less than 10% of gross earnings

It finds that with the exception of what it calls "the working poor," most Canadians must save 10 to 21% of gross earnings every year to get to the 70% replacement ratio in retirement. "This fraction is likely higher than many Canadians believe and higher than is set aside in most employer-based group RSPs or defined-contribution plans," the authors write, "It is also higher than the effective contribution over time to many employer-sponsored defined-benefits plans, and for high-income earners exceeds the annual limits placed on RRSP contributions."

Note that last point, given an earlier CD Howe recommendation that RRSP contribution limits be almost doubled from the current 18% of earned income and $22,000 maximum to 34% and $42,000 respectively, as reported in this blog here early in February. The recent federal budget ignored the recommendation but indicated further consultation will occur in the spring. In today's e-brief, the institute adds that "Income Tax Act limits would prevent many earners from accumulating enough RRSP savings over 33 years (by age 63) to replace 70% or more of their working income."

Delaying retirement to age 67 so you save for 37 years reduces the fraction that must be saved somewhat, "but the required saving rate still remains high," the brief says, "People wishing to retire even earlier at 63 face even higher costs."

Delaying saving past 30 means saving more than 20% of income

And as all the nation's banks tell us during RRSP season, delaying the commencement of saving past age 30 means eventually having to save what the institute calls "extraordinarily large fractions of income -- more than 20%" for many above-average earners during the last decade of one's working years.

The paper concludes on a public policy note, saying the debate on how to improve our pension system is "well founded." Policy changes can improve incentives to save for retirement and to more efficiently manage retirement savings. But CD Howe's final line in the brief could have been written by virtually any financial planner or advisor: "In the end, if Canadians want high incomes and consumption in their retirement years, they will have to save more of their incomes and forgo more consumption during their earning years."

Malcolm Hamilton: dreams "shattered" only if you accept 70% replacement target

Asked for his reaction to the paper, Mercer's actuary Malcolm Hamilton -- pictured left from a Wealthy Boomer video interview last year -- said he had read an earlier draft but little appears to have changed. Here, unfiltered by me and only lightly edited, is his input sent by email. I've italicized it to make it clear the authorship is his, not mine. I've added the subheads in bold:

The paper shows that:

* If you want to replace 70% of your gross income when you retire at 65, and
* If you earn an above average wage,

then you need to save quite a bit from a rather young age (30). If you want to retire early with that same standard of living, you need to save even more. The conclusions are very sensitive to assumptions about future returns, but that's the way it is.

The big question is whether you need to replace 70% of your gross income to preserve your standard of living when you retire. Most Canadians retire with closer to 50% replacement. Most say that their quality of life is as good or better after retirement than before. As you know, I always felt that 50% would preserve the standard of living of the average family of 4 because a large percentage of their pre retirement income (often 40% to 50%) is consumed by kids, mortgages and taxes.

50% replacement ratio may suffice to preserve low standard of living while working

All of these burdens are hopefully gone by the time they retire. Their pre retirement standard of living is low. The good news is that they don't need to save much to preserve this low standard of living. One of the tables in the report concludes that those with average earnings can retire with 50% replacement at age 65 by saving only 5% of their incomes ... as compared to 11% if they want 70% replacement.

I do worry about the message accompanying the paper ... in essence that Canadians are saving too little and that their dreams will be shattered when they retire. This is true if we accept the 70% target. But it is not true if the target is wrong, and no evidence is offered in support of the 70% target. In essence, if you assume that everyone needs more than they really need when they retire, you conclude that everyone's dream will be shattered ... but so what?

Obsessive retirement saving shouldn't come at cost of raising families

We need to strive for a more balanced perspective. Yes, we want people to have adequate incomes when they retire. But we also want them to have adequate incomes when they are carrying a mortgage and raising their children. Telling them to save obsessively solves the first problem but exacerbates the second. And from my perspective, the second problem may
be the bigger one.

When it comes to mortgage details, most people just 'zone out'

James Pasternak, Financial Post

It is a legal document that stretches about 30 pages and runs about 10,000 words. Its execution takes no more than a couple minutes and when the ink dries on the signature lines, more times than not it is never read and gets slipped into a file folder, largely forgotten.

But despite its casual handling, the residential mortgage agreement governs the largest debt of over 5 million Canadians and within its fine print are the provisions that can make or break a household's financial future. There's a lot at stake. At the beginning of 2004, Canadians held $517.7-billion in mortgages.

"I think most of the major bank representatives do a good job of explaining these provisions to their clients but I think most people zone out and don't really listen. All they think about is getting a mortgage at 3.8% and ‘I want to get this done'," says Len Rodness, Partner, of Toronto-based law firm Torkin Manes (www.torkinmanes.com)

But beyond the interest rate there are a wide range of options and clauses in the mortgage agreement that deserve scrutiny. In a competitive lending environment, shopping for the right mortgage can bring significant savings and peace of mind through the amortization period.

Take the case of Hamilton, Ont., couple Kathy Funke and Dan Perryman. When they were shopping for a home in 2003, the interest rate was the top priority. They also wanted flexible prepayment options and accelerated weekly mortgage payments. To leverage the competitive interest rate they received, they went with a variable rate mortgage. They paid off a $230,000 mortgage in 5 ½ years.

"The power in these things comes from people who know how to manage [the] various privileges. It has a huge [savings] effect on amortization....The ideal thing is to understand what your privileges are and then combine them to your advantage -- to what you can afford to do; to fit your lifestyle and ability to pay," says Jeff Atlin of Thornhill, Ont. based Abacus Mortgages Inc.

And privileges there are. You just have to shop for them.

Accelerated Payment Options: Getting the loan paid earlier

It just seemed like yesteryear when everyone was paying their mortgage on the 1st of every month. Now, in addition to the first of the month option, some of the more common options are accelerated weekly and biweekly or semi-monthly options.

These frequency options result in long term savings. For example if one selects the accelerated biweekly option one is making 26 payments in a year, the equivalent of two prepayments per year over the monthly option. When a $150,000 mortgage amortized over 25 years is paid under an accelerated bi-weekly option, the debt is retired in 21 years and the interest savings are around $18,000.

Toronto resident and electrician Karl Klos, 26, selected "weekly rapid" payments on a mortgage amortized over 35 years. The mortgage payments are made each week but he added the "rapid" option by increasing the amount paid. Mr. Klos says that the payment frequency will pay off his mortgage in 25 years instead of 35 years.

"I can't understand why anybody would do monthly payments anymore now that the banks offer the ability to have weekly payments. It may be a cash flow situation. If you do a weekly mortgage payment it could save you a significant amount of money," says real estate lawyer Len Rodness.

Restating mortgage agreement vows

It doesn't take long after one signs a mortgage agreement to hear from a neighbour or friend that they received a better rate. So when you dig out the mortgage agreement see if there's a clause that allows borrowers to renegotiate their agreement before the end of the term. The bank might use a model called "blend and extend." For example, if one has a $100,000 mortgage at 6% mortgage with two years to go they might blend it with the current five year rate of 3.79%. So according to mortgage broker Atlin when they average out 2/5 of the mortgage at 6% and 3/5 are at 3.79%, the customer will get a new reduced rate of about 4.6%. But the borrower is tied to the bank for another 5 years.

Putting spare cash against the mortgage with no penalty

Almost all mortgage agreements have options for mortgage prepayment without penalty. Klos's mortgage agreement allows prepayments of up to 15% of the annual balance. Most financial institutions provide prepayment options in the 10-20% range. Some lenders allow borrowers to make the prepayment any time during the year while other agreements restrict the prepayment to the anniversary date.

Also, some financial institutions allow customers to make multiple smaller prepayments during the year as long as they don't exceed the annual limit. Funke and Perryman were able to retire their $230,000 mortgage in 5 ½ years primarily because of the prepayment provisions in their mortgage.

Coming up with more money for each payment

Some lenders will allow borrowers to increase the payments without penalty. Depending on the wording of the mortgage agreement the increased payments can range from around 15% to 100% of the current payment. So if one is paying $1,000 per month under the 15% rule, a borrower can raise it to $1,150 per month. Klos's weekly rapid payment plan was based on him raising the weekly payments by 5%.

"Payment and amortization are a function of each other. Any time you raise the payments you shorten the amortization; any time you shorten the amortization you raise the payment," says Mr. Atlin.

The mortgage prenuptial: Penalties for getting out of your mortgage

"A mortgage is a contract first and foremost. It is a contract between a borrower and the lender," Atlin says. And if someone hasn't felt that cold business approach during the course of their mortgage, they certainly will if they try to leave early. Most borrowers pay out their mortgages when they sell their house, win a lottery or are offered a better interest rate by another company. Until recent years, the standard penalty for breaking a mortgage agreement was three months of interest. Paying out a $200,000 mortgage could amount to a $2,500 penalty.

In many current mortgage agreements, the penalty for an early exit (and not extending) is either three months of interest or an interest differential, whichever is greatest.

The mortgage differential penalty can be quite expensive. If a mortgage is at 5% interest rate and you have three years left in your term, the bank will use the difference between the agreement rate and the current market rate to calculate the penalty. Using the 5% case above, let's say the current 3-year mortgage is available at 3.5%. The bank will charge the difference between 5% and 3.5% for the balance of your term.

Bank customers who have an open mortgage with a variable rate can usually pay them out with little or no penalty. Some mortgages are closed for the first few years and then revert to an open option. The penalties, if there are any, would be much lower once the mortgage converts to an open one. If one can, it would be best to wait until the mortgage kicks into open status.

When paying out the mortgage try to have some of it calculated as your annual no-penalty prepayment option. Therefore, if you are paying out a $200,000 mortgage and you also have a 20% per annum prepayment option you might be able to save penalties on $40,000. If the mortgage prepayments can only be done on the anniversary date, make sure that is the day you select to pay out the mortgage.

Mortgage Lifelines

Mortgages are often signed and sealed with the borrower having every intention to pay. However, the world is paved with best intentions and recessions are everyone else's problem until the boss comes into your office with the bad news.

"That is something that nobody turns their attention to at the time. The original document is done. The legal issues are in that original document. For a practical point of view given the state of the economy these [clauses] might be something beneficial," said Len Rodness of Torkin Manes.

Some mortgages include a Rainy Day option. This option allows the borrower to skip one principal and interest payment each mortgage year. The interest portion of the skipped payment or payments will be added to the outstanding principal balance.
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/story.html?id=2631845#ixzz0iTZkol9e

High Canadian dollar here to stay, economists say

By The Canadian Press OTTAWA - The high Canadian dollar appears to be here to stay despite what the Bank of Canada or inflation do to impact the currency.

Economists say the loonie, which jumped past 99 cents US on Wednesday, could hit parity at any time.

And unlike two years ago when the currency fell off the parity perch against the U.S. greenback as quickly as it had climbed, this time there will be no sudden retreat.

Under normal circumstances, Friday's inflation numbers should provide a downward draft to the loonie's flight.

The consensus of economists is for inflation, which hit 1.9 per cent in January, to fall all the way back to 1.4 per cent in February's data.

That won't matter, however, says TD deputy chief economist Craig Alexander.

He says the markets have already priced in that inflation will be low going forward, as they have that the Bank of Canada will likely move well before the U.S. Federal Reserve in raising interests rates.

Whether the loonie is slightly below parity, at parity or a little above, Alexander says the key point is that Canadians should expect the currency to remain strong for some time.

Also pushing up the currency is the perception that Canada's resources-based economy will continue to benefit from high oil and mineral prices.

Industry Minister Tony Clement said Canadian businesses are learning to live with the new reality.

"Obviously, historically it's been an issue for Canada," he said of the negative impact of a strong currency on industry.

"What we're seeing," he added, "is that Canadian manufacturers and other exporters are learning to live with the higher dollar."

http://ca.news.finance.yahoo.com/s/17032010/2/biz-finance-high-canadian-dollar-stay-economists-say.html

Cost of owning a home up slightly in late 2009; will continue to rise: RBC

Sunny Freeman , The Canadian Press

TORONTO - Home prices will continue to rise this spring as buyers scramble to close deals ahead of expected higher interest rates, new mortgage rules and new taxes in two key markets.

A report by RBC Economics issued Monday found that the cost of owning a home in Canada increased slightly across all housing segments in the closing months of 2009.

Strong demand, fuelled by exceptionally low mortgage rates, has increased competition for the limited supply of homes for sale, which continues to drive prices up, the report said.

RBC senior economist Robert Hogue said the problem is likely to get worse with an anticipated rise in interest rates in the second half of the year.

The Bank of Canada has pledged to keep its key overnight rate at 0.25 per cent, where it has been since last spring, until the end of the second quarter. But economists anticipate it will begin rising as early as July.

Historically low interest rates have been cited among reasons for the strong housing market, with sales of existing homes moving higher again in February and setting monthly records in both Ontario and Quebec.

The Canadian Real Estate Association said 36,275 homes were sold across the country in February, up 44 per cent from the same month in 2009, when the recession was still impacting both consumer optimism and loan activity.

But February's year-over-year gain was much smaller than in the previous three months, CREA said. Part of the reason was that February home sales were down in Vancouver as the Olympics impacted activity there even as sales in Toronto logged an equally large gain.

Overall, seasonally adjusted home sales were down 1.5 per cent in February compared with January.

Economists predict that real estate markets in B.C. and Ontario will remain hot in the months prior to the introduction of the harmonized sales tax in those provinces on July 1, which will increase the transaction costs associated with a home purchase.

Douglas Porter, deputy chief economist at BMO Capital Markets, said some buyers in Ontario and B.C., which combined account for over half of national sales, are advancing their purchases to avoid paying the HST.

"It's no coincidence that Ontario and B.C. have seen the biggest gain in sales in the country," he said.

CREA chief economist Gregory Klump said buyers in those provinces are driving national sales activity higher in the first part of the year.

"It should remain a tight market with negotiations favouring the seller in a number of major markets in the first half of this year," he said.

Klump said that strong resale housing demand continues to draw down inventories, but softer sales activity and an increase in new listings in recent months has helped slow the depletion of available properties.

"Those sellers who moved to the sidelines at the depth of the recession will be putting their homes back on the market in response to headline average price increases," he said. "

Porter said the increase in supply from ultra-low levels helps bring the market closer to balance, but that the still-tight market means prices will remain high.

"We're going to get a very hot market in the next few months but it won't overheat," he said.

"I think we'll get one more wave of relatively strong numbers over the spring and then we'll crest and the market will come off the boil in the second half of the year."

He added that Ottawa's recent efforts to "release some steam from the market" will help slow activity, and "the housing market will pull up just short of bubble territory."

Finance Minister Jim Flaherty announced new mortgage qualification rules last month to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road when rates return to more normal levels.

In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.

Porter said the changes will prompt those affected - primarily first-time buyers and investors - to buy in advance of the new rules, and bump up sales in March.

Still, other buyers could be hesitant to enter the frenzied market this spring and may tolerate a small spike in interest rates and wait for conditions to cool off, he said.

"Some cooler heads will decide they can get a better deal in the second half of the year even if it does come at a higher interest rate."

The Flaherty effect

Helen Morris, National Post

Many of us have been enjoying supremely attractive interest rates on mortgages. However, with rates having been at historic lows for quite some time and with the economy heating up, the only direction rates will go from here is up. The finance minister wants to ensure borrowers are in good financial shape to withstand rate hikes, which are expected to hit this summer.

Finance Minister Jim Flaherty announced that by April 19 new mortgage criteria will apply. Lenders will now be testing whether buyers can afford a mortgage using a higher interest rate. The new rules apply to mortgages backed by government insurance, a requirement when there is less than a 20% deposit.

"What will tend to happen is that the same practices will cascade through the entire financial system. So when borrowers come in to take out mortgages, they all will be tested against the five-year posted rate," says Craig Alexander, deputy chief economist at TD Bank Financial Group. "It increases the qualifying interest rate by about one percentage point."

The higher rate will be used just for the qualifying process - it does not mean your mortgage rate will be higher - at least not right now.

"Any mortgage professional that's worth their salt is sitting down with their client already and saying, ‘Can you afford a 1% or 2% rate increase?' " says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. "We tend to want to have those customers looking forward. If they're stretched to their maximum at today's low interest rates, then there could be some financial considerations two years down the road if indeed they have to take a look at higher interest rates."

So, if there's an April 19 deadline, won't that make it more tempting to try to get a mortgage now?

"Folks shouldn't rush to buy; you don't want to get caught up in the potentially emotional period that might go on between now and April 19. If you can wait, I would suggest waiting," says John Turner, director of mortgages, Bank of Montreal. "It's important for the potential consumer to sit down with their banker and get prequalified. They want to lock in their interest rate so they can take their time and make the right decision. They want to make sure that they can afford the house that they are buying."

Mr. Alexander says about one-quarter of those looking to purchase a home will likely be affected by the new rules and may have to settle for a smaller home, but he estimates only 4% or 5% will not buy because of the tighter qualification process.

Under the new rules, existing homeowners will only be able to withdraw 90% of the value of their homes when refinancing, down from 95%.

"People who would be looking for [high refinancing] are probably in some sort of financial strife already, so it's probably something they shouldn't be doing," Mr. Rawson says.

The third set of property owners in Mr. Flaherty's sights are those looking to invest in rather than live in a home.

"People buying a property they are not going to live in now have to put 20% down; before, it was 5% down. That's a really big change," Mr. Alexander says. "That measure is really aimed at speculators. The government said specifically the objective was to diminish speculation in the marketplace."

The new requirement may affect the Toronto condo market, Mr. Alexander says.

"Demand growth will probably be tempered by some of these new rules. ... If there were people looking to buy a couple of extra condo properties as an investment ... it doesn't mean people can't do it but if you're going from 5% to 20%, instead of buying four properties with the same amount of money, maybe you end up buying one."

The new rules plus more new condos coming on stream may cool the market, Mr. Alexander says, but adds that the Toronto real estate market remains fundamentally strong with demand boosted by immigration

Why Canada's housing market didn't burst

| Tuesday, 16 February 2010

Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis.Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. As a result, observers such as The Economist have pointed to Canada as "a country that got things right."

The different housing market outcomes in Canada and the U.S. can tell us something about the underlying causes of the housing boom and subsequent bust in the latter. In particular, they can be used to evaluate the roles that low interest rates and relaxed lending standards played.

Monetary Policy and the U.S. Housing Bust Some observers blame monetary policy for lowering interest rates over 2002-2005, pushing up housing demand, increasing residential investment and raising housing prices. In this view, the monetary-policy induced housing boom thus set the stage for an inevitable housing bust.

The low interest rate policy of the Federal Reserve over 2001-2005 is often cited as a key factor in the U.S. housing bust. The main narrative is that by lowering short-term interest rates, longer-maturity mortgage interest rates are pushed down. This increases the demand for housing, puts upward pressure on housing prices and encourages builders to ramp-up construction of new homes. This leads to an "oversupply" of new homes, which triggered the housing bust in the U.S.

There are also claims that interest rates were too low over 2001-2005, when looked at by both historical standards, as well as compared to those predicted by the Taylor rule (a monetary policy rule which relates U.S. Federal Reserve's ideal target rates to inflation and GDP).

The Bank of Canada made dramatic reductions in its target interest rate over 2001-2002, but one might argue that Canadian monetary policy was not quite as "loose" as that in the U.S. as it maintained a higher overnight rate over 2002 to 2004.

But a case can be made that Canadian and American monetary policies were very similar, at least in terms of the housing market. Estimates put the deviations from the Taylor rule for Canada and the U.S. over 2001-2006 to be nearly identical. In fact, the two benchmark mortgage interest rates move closely with one another until after the beginning of the U.S. housing market crisis, when U.S. rates fell significantly below Canadian rates.

Mortgage interest rates-the main direct channel through which monetary policy impacts the housing market-tracked each other closely in the two countries, but unlike the U.S., where the mainstay of the mortgage market is the 30-year fixed mortgage, the most common mortgage product in Canada is a five-year fixed-rate mortgage (with a 25-year amortization period).

Relaxed Lending Standards: different subprime lending booms
Another leading explanation of the housing boom and bust relies critically on relaxed lending standards. This story is linked to the dramatic rise in subprime lending and high levels of loan securitization, which some commentators have argued reduced the incentives for mortgage originators to maintain underwriting standards. This is one area where there was a significant difference between the two countries, both in the size and nature of the subprime market and in the fraction of mortgages securitized.

Subprime lending has grown rapidly in both countries, though the magnitude has been far more striking in the U.S. While subprime mortgages accounted for less than five per cent of mortgage originations in the U.S. in 1994, one-fifth of all mortgages originated between 2004 and 2006 were subprime.
But while subprime lending also increased in Canada, it remained much smaller than in the U.S.

The most cited estimate is that subprime lenders had a market share of roughly five per cent in 2006, compared to 22 per cent in the U.S. Moreover, the Canadian subprime market never expanded significantly into newer products, such as interest-only or negative amortization mortgages, whose popularity grew rapidly in the U.S. from 2003 to 2006. Instead, the Canadian subprime market mainly offered products popularized in the U.S. during the 1990s, such as longer amortization periods for loans (from 25 to 40 years), and mainly targeted near-prime borrowers.

Securitization has also been less common in Canada than in the United States, with roughly 25 per cent of Canadian mortgages securitized in 2007 versus nearly 60 per cent in the U.S. The Canadian securitization market has grown rapidly over the past decade, rising from roughly five per cent of mortgages in 1998 to over 25 per cent in 2008.

However, in many ways, the Canadian market resembles the early stages of the U.S. mortgage securitization market, as most securitized mortgages in Canada are backed by an explicit government guarantee. This government guarantee requires limits on borrowers' debt-service ratios and amortization periods, which makes it more difficult for lenders to offer some types of subprime loans.

The subprime story is also consistent with the different pattern of mortgage delinquencies in Canada and the U.S. In the U.S., mortgage delinquencies for both prime and nonprime mortgages began to rise before the recession began and unemployment rates began to climb.

In contrast, mortgage delinquencies in Canada have only recently begun to increase, after unemployment rates started rising and the Canadian and world economies slowed sharply in the fall of 2008. Finally, the relaxed lending story is consistent with the fact that the U.S. experienced a housing bust over 2007-2009 while Canada did not.

While the expansion of subprime lending provided a temporary boost to housing price growth rates, when prices stopped rising, the inability of some borrowers to refinance homes they could not afford led to a spike of delinquencies. The resulting increase in liquidation and foreclosure sales put additional downward pressure on house prices, which, in turn, pushed more borrowers into default. This negative feedback cycle helped push a correction in the housing market into a housing bust.

One possible critique of this argument is that while Canada has not yet experienced a housing bust, it is likely to experience one in the next year. Indeed, a recent Merrill-Lynch- Canada report noted that Canadian house prices over the past decade closely resemble U.S. house prices with a two-year lag. Based on this, they concluded that Canada was also likely to experience large decline in house prices over the coming year.

Canada's smaller subprime market share and fewer households with high LTV ratios, however, suggest that the country is less likely to see the rapid increase in defaults that helped trigger the bust in U.S. housing prices. So far the incoming data suggest that the Canadian housing market is likely to experience a housing market slowdown rather than a bust.

Fix the deficit first, Bernanke tells U.S. politicians

KEVIN CARMICHAEL

From Thursday's Globe and Mail Published on Thursday, Feb. 25, 2010 12:00AM EST Last updated on Saturday, Feb. 27, 2010 4:34AM EST

U.S. Federal Reserve Chairman Ben Bernanke prodded his country's politicians to get serious about a budget deficit that the central bank chief said is unsustainable.

Over the course of almost four hours of testimony at the House financial committee yesterday, Mr. Bernanke was asked more about the country's record deficit and debt than any other subject, putting him in the middle of a debate that Democratic President Barack Obama and his Republican opponents in Congress appear eager to have but unwilling to resolve.

Mr. Bernanke stepped gingerly around queries that reflected the challenges of a country struggling to escape recession, yet were often political traps rigged to manipulate Mr. Bernanke into embarrassing one side or the other.

Seeking neutral ground, the Fed chief said it was "very, very important" that the administration and Congress come up with a credible plan to deal with the $1.6-trillion (U.S.) deficit. He stressed that the effort would pay immediate dividends by easing the minds of the investors who finance the government's operations.

"Even a strong effort would be a boost to confidence," Mr. Bernanke said during proceedings that were broadcast on the committee's website.

His appearance was the first stage of Mr. Bernanke's semi-annual report to Congress on monetary policy. He will appear before senators today.

In his prepared remarks yesterday, he reiterated that the "nascent" U.S. recovery will require low interest rates for an "extended period." Stock markets rose after that pledge, as equity investors were reassured the Fed remains far from tightening monetary policy.

The second-most important issue for the committee yesterday was jobs. The Fed predicts the unemployment rate, currently around 10 per cent, will still be at an uncharacteristically high rate of about 7 per cent at the end of 2012. Beyond keeping borrowing costs low, the Fed is working hard to understand what is impeding lending to small businesses, Mr. Bernanke said.

At $1.6-trillion, the U.S. deficit represents about 10 per cent of the world's largest economy. The financial plan Mr. Obama released earlier this month predicts the shortfall will be narrowed to about 4 per cent of GDP by 2014. Congress must pass the budget.

Under tough questioning from California Republican Edward Royce, the Fed Chairman conceded that Mr. Obama's proposal doesn't do enough to contain the growth of the debt - a statement that made for an uncomfortable moment for Mr. Bernanke, who generally seeks to stay out of the political fray.

Most economists, including Mr. Bernanke, say the debt won't shrink until the deficit is restrained to about 3 per cent of GDP. That's roughly the annual rate of growth the U.S. economy can manage in normal times without stoking inflation. If the deficit grows more quickly than the economy, the government has no ability to begin paring the debt.

Mr. Bernanke said it would be a mistake to try to balance the budget over the next couple of years because the economy is still highly dependent on government spending. He also said the risk of higher interest rates would recede if investors become convinced that the White House and Congress were compromising on the issue.

When will Bank of Canada raise Rate?

Jeremy Torobin

Ottawa — Globe and Mail Update Published on Tuesday, Mar. 02, 2010 9:11AM EST Last updated on Tuesday, Mar. 02, 2010 10:41AM EST

The Bank of Canada kept its benchmark lending rate at a historic low 0.25 per cent Tuesday, while hinting that policy makers are on closer guard for shifts in the inflation outlook that might force them to rethink their pledge to stay on hold through midyear.

In the statement accompanying Tuesday's decision, Governor Mark Carney and his rate-setting panel acknowledged that growth and inflation have been hotter than policy makers projected in their January forecast, saying the economy's 5-per-cent growth in the fourth quarter was ``spurred by vigorous domestic spending and further recovery in exports.”

Also, in a nod to the fact core inflation came in at the central bank's 2-per-cent target in January, sooner than policy makers had anticipated, they sounded a somewhat more hawkish tone on price gains. The central bank said the risks to their inflation outlook are now ``roughly balanced,” as opposed to language from previous statements which had said inflation risks were ``tilted slightly to the downside.”

The bank also added the word ``current” in its key sentence reiterating Mr. Carney's commitment to keep borrowing costs at their record-low level, suggesting the next decision on April 20 could mark the beginning of the end of easy money as the central bank prepares to lay out how it plans to tighten in the second half of the year.

While few economists expect Mr. Carney to raise interest rates before that commitment runs out, recent data and the current statement suggest there is more pressure on the bank to consider unleashing a series of rate hikes over several decisions starting in July, or raise rates more steeply than the typical 25-basis point moves.

``Carney and Co. are starting to feel the urge to tighten, not a strong urge now, but an urge nevertheless,” Michael Gregory, a senior economist with BMO Capital Markets, said in a note to clients. ``We still judge that the Bank will hike rates 25 basis points on July 20, with rising risks that this and/or subsequent moves could be in larger increments.''

Core inflation has been ``slightly firmer” than expected, the bank said, as a result of ``both transitory factors and the higher level of economic activity.” The reference to ``transitory factors” likely refers to recent gains in prices for automobiles such as trucks, which don't seem sustainable, and housing prices.

``Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target,” the bank said.

Policy makers also dropped a reference to the central bank retaining ``considerable flexibility” in using monetary policy to cement the economic recovery. That suggests measures such as so-called quantitative easing, which involves creating new money to purchase government or private assets in a bid to encourage more bank lending – a step taken by other major central banks around the world but not Canada's.

At the same time, the bank said the inflation outlook should not only continue to reflect ``stronger domestic demand,” but also ``slowing wage growth, and overall excess supply.” And Mr. Carney and his deputies repeated that ``persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada.”

Central bankers have said the economy won't be running at full tilt until the second half of 2011. However, the January inflation data, released last week, and Monday's gross domestic product report from Statistics Canada suggest the slack in the economy may be disappearing more quickly than the bank projected in January.

The April 20 rate decision is also important because it will offer the first taste of the Bank of Canada's next economic forecast, due two days later.

Even central bank-watchers who have argued Mr. Carney won't raise rates until the final three months of the year at the earliest are now saying the bank could act with more urgency.

``The Bank of Canada has walked a fine line with its latest decision, though overall it is undeniable that the risks to Canadian monetary policy are starting to tilt upwards,” Eric Lascelles, top rates strategist for TD Securities, said in a note. ``Our house view remains that the Bank of Canada will first hike in October, but it is hardly inconceivable that this could now come a touch sooner, in September or possibly even July.”

Most central banks expected to hold firm

Bank of Canada, ECB and Bank of England meet this week, though Reserve Bank of Australia may break from pack again

Brian Milner

Globe and Mail Update Published on Sunday, Feb. 28, 2010 9:29PM EST Last updated on Monday, Mar. 01, 2010 4:20AM EST

The world's major central banks are painfully aware that they are nearing an important policy crossroads as they weigh the rising risks of maintaining historically low rates for too long.

When the Bank of Canada announces its latest decision tomorrow morning, its benchmark target is expected to remain at a record low 0.25 per cent, putting the central bank in the same camp as the U.S. Federal Reserve Board, the European Central Bank, the Bank of England and most of the developed world's other monetary policy setters.

No one disputes that the days of easy money must come to an end. But for now, most central bankers are keeping their fingers firmly on the hold button, as concerns about still-fragile economies outweigh fears that the unprecedented monetary stimulus is stoking inflation and fuelling new asset bubbles. This is expected to be evident this week as the Bank of Canada, the ECB and the Bank of England make their latest decisions.

Australia's central bank also meets this week, though it has been on a different path.

“We don't anticipate any rate increases from any of these central banks, outside of the Reserve Bank of Australia, until much later in the year,” said Sal Guatieri, a senior economist with BMO Nesbitt Burns.

With the economy expanding, private sector investment growing and unemployment falling, the Australian central bank boosted interest rates three times late last year to 3.75 per cent and is expected to do so again Tuesday.

Among other key central banks, it may well be the Bank of Canada that leads the stampede to higher rates, starting this summer, because Canada's economy and fiscal house are in considerably better shape than those of the United States, Britain or much of the euro zone, analysts say.

The bank's chief, Mark Carney, pledged last spring to leave the benchmark rate at its current rock-bottom level until at least mid-2010, depending on the inflation outlook.

With inflation still largely benign and the economy facing a hard road back to self-sustaining growth, the bank's call is an easy one.

“I expect to see that conditional commitment maintained,” said Eric Lascelles, chief economics and rates strategist with TD Securities. “It would be awfully surprising if it was abandoned just before it naturally matured.”

Other central banks never provided such clear direction to the markets so long in advance. The Fed, for instance, said only that it would not raise rates for an extended period. Now Fed chairman Ben Bernanke faces the tricky task of removing that language without leaving the market expecting an imminent rate hike.

Mr. Bernanke took pains last week to assure Congress there are no plans to raise rates, because the economy remains too feeble to stand on its own. The bank has also denied that an increase in its discount rate (charged to banks for short-term money) signals an imminent tightening of credit.

“They're preparing for their exit strategy, but they recognize that they're really not close to exiting,” said Robert Brusca, chief economist with FAO Economics in New York and a long-time Fed watcher.

But central banks cannot put off the day of reckoning much longer and they must hike rates aggressively to keep inflation in check, economists warn.

“If the Bank [of Canada] raises the rate only gradually and in small increments, inflation pressures will emerge,” Michael Parkin, a professor emeritus of economics at the University of Western Ontario, said in an e-mail exchange. “These pressures won't come through as faster CPI inflation for some time – probably not until late 2011 or early 2012. But they will influence other prices, perhaps that of housing and some durables, earlier.”

Eventually, as inflation expectations take hold, “the bank is backed into the corner of having to raise the policy rate above its long-term average and slow economic growth,” said Prof. Parkin, whose paper on the subject was released last week by the C.D. Howe Institute.

Prof. Parkin and several other central bank watchers also shot down the idea, championed by prominent Harvard economist Kenneth Rogoff, that the removal of fiscal stimulus should come before any monetary tightening, even at the risk of some inflation.

“The U.S. is in a state of paralysis in its fiscal policy. Monetary policy will tighten first, and I don't think it's the right mix,” Prof. Rogoff told a conference in Tokyo last week. “When they start tightening monetary policy even a little bit, it's going to send shock waves through the system.”

But what happens if the economy suddenly turns around and starts growing rapidly, Mr. Brusca asked. “Is the central bank supposed to wait and wait and wait until the growth has an impact on fiscal policy? It doesn't make any sense to me.”