economists’ view that the Bank of Canada will begin raising its benchmark rate in the second quarter – either in April or May – or at the very least in July, once the US Federal Reserve is scheduled to end its US$600 billion asset purchase plan.

Not so says Scotiabank. It’s among the few research houses on Bay Street that believe the Bank of Canada, led by governor Mark Carney, will wait much longer – until October to be more precise. (Meanwhile, analysts at Capital Economics have reiterated their view the central bank remains on hold for all of 2011.) The main culprit: A weak US dollar, which could drive the loonie to US$1.08 by the end of the year.

Scotiabank economists Derek Holt and Gorica Djeric offered a detailed explanation of its view in a note to clients. 

Click here for a summary of Scotiabank’s arguments in the Financial Post.

changes still needed to protect consumers. Let’s start with Ted Menzies, the minister of state for finance, who announced “consumer friendly” rules for federally regulated banks.

The proposed changes would reduce the time banks hold onto cheques before clearing them to four business days (from seven) and give customers immediate access to the first $100 of a deposit.

Banks would also have to stop billing for products and services before getting customers’ consent. This practice, known as negative option billing, was outlawed by the Ontario government in 2005.

Not included is a promise in last year’s budget to make banks standardize the calculation and disclosure of mortgage prepayment penalties.

improving Canadians’ ability to manage and repay debt, while also suggesting the federal government introduce more stringent standards for mortgage qualification.

Action Canada’s Task Force on Household Debt, which has been meeting for the past six months, released its report entitled “Debt Crunch: Policy Recommendations for Addressing Canada’s Record Level of Household Debt”, which called on the government along with Canada’s banks and financial institutions to implement a Code of Conduct on Lending (CCL) to “promote standards that would decrease borrowers’ financial vulnerability associated with high levels of household debt and ensure they understand the potential risks associated with mortgage and consumer debt.”

Derek Dunfield, from MIT’s Sloan School of Management and a member of the task force, suggested Canada could be in for a reckoning, and argued banks needed to play a more active role in discouraging Canadians not to borrow more than they can afford.

The report referred to the “culture of borrowing” in Canada, which presents two possible problems for the economy. If interest rates rise and housing prices drop, more people could begin to default on their mortgage and credit card payments, Dunfield said.

Click here to read more from Mortgagebrokernews.ca.

offered by the nation’s banks has narrowed to about the least in four years as lenders absorb higher borrowing costs to try to increase their share of the country’s surging mortgage market.

The spread between bond yields and the Bank of Canada’s index of five-year conventional mortgage rates shrank to 2.68 percentage points on March 4th, from a recent high of about 5.15 in January 2009, according to data compiled by Bloomberg. The current spread means borrowers are paying about one-half of a percentage point less on a five-year fixed mortgage rate than they would otherwise if the gap was at its average.

The tighter spreads reflects the health of Canada’s housing and mortgage market, prompting lenders including Royal Bank and TD Canada Trust to say that consumer banking margins are tightening due to increased competition. Mortgage credit rose 7% in 2010 in Canada, where house prices now exceed their pre-recession peak, unlike in the US, where prices remain depressed from 2008.

“When everyone’s trying to compete for the same loan, that compresses margins within the banks,” said Craig Fehr, a bank analyst at Edward Jones & Co in St. Louis. “Add to that the fact that rates are very low, so if you’re not earning much on the spread side of the business, you try to make it up in volumes.”

Click here for the full Bloomberg article.

Canadian homeowners are much more confident than government officials and economists about their ability to pay off mortgages, even if the market takes a turn for the worse, according to a survey released Wednesday.

The Royal Bank’s annual outlook suggests 85 per cent of respondents think they are doing a good job paying off their loan obligations, and 73 per cent think they are well positioned even if the housing market were to drop.

“The reason that stood out to me is because of all the commentary we’ve all been hearing about Canadians being overextended, all of those various concerns bubbling around,” said Marcia Moffat, RBC head of home equity financing.

The findings contrast with a slew of statistics and warnings from top economists — including Bank of Canada governor Mark Carney — that Canadians are getting in over their heads and may find themselves in difficulty when interest rates rise.

Statistics Canada’s most recent report showed that the debt-to-disposable income ratio of Canadians hit a record 148 per cent in the third quarter, even beating out Americans for indebtedness. Put another way, the figure means Canadians owe $1.48 for every dollar they earn.

But the Royal Bank survey, conducted in January, could also be a sign that Canadians are taking heed after more than a year of warnings issued by the Bank of Canada and the federal government about debt exposure.

“There has been a lot in the media around … (those) concerns for at least the last year and maybe Canadians have been listening, seeking out advice, and ensuring that they’re in a strong financial position,” Moffat said.

“If you’ve got a concern about something transpiring, you may try to get ahead of it to put yourself in a better financial position.”

Canadians’ growing optimism about their debt situations could stem largely from increased job stability and rising incomes, which are providing a better backdrop to pay down debt, Moffat added.

But the government is less assured.

Its third round of tightening mortgage rules in as many years is set to take effect later this month.

New measures introduced by Finance Minister Jim Flaherty to rein in borrowing will take effect March 18. The changes include reducing the amortization period on government-insured mortgages from 35 to 30 years, limiting the size of home-equity loans and removing government insurance on lines of credit secured on homes.

Interest rates are widely expected to rise in the second half of this year, driving up the borrowing costs for variable mortgages and other loans linked to bank’s prime borrowing rates.

Still, 90 per cent of respondents in the Royal Bank survey said they were confident about real estate as an investment and a large majority still thought it was a good time to buy.

Interest in purchasing a new home over the next two years has fallen, but only slightly. At 29 per cent, the number is considered strong and is still better higher than it was 2006.

However, fewer respondents than in last year’s survey said it was better to buy now rather than wait, suggesting that buyers aren’t feeling the same sense of urgency to get into the market.

Buyers rushed into the market in the opening months of last year to beat a combination of rising interest rates, new mortgage rules and the HST in two provinces.

“Last year’s survey showed that people were looking to buy ahead of rising costs,” said Moffat.

“This year marks a return to more normal levels of purchase intentions and recent housing data reflects this move to a more balanced market.”

Nearly 70 per cent of homeowners said the value of their homes has increased in the last two years.

Meanwhile, a Statistics Canada report also released Wednesday suggested that prices for new houses continued to rise at the beginning of this year along with resale home prices.

The federal agency’s new home price index rose 0.2 per cent in January from the level in December. http://ca.finance.yahoo.com/news/Homeowners-confident-ability-capress-3265943785.html?x=0

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

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

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

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

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

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

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

HOUSING POLL SHOWS CONFIDENCE

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

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

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

It showed almost three-quarters of Canadians, or 73 percent, believe that they or their families are well-positioned in the event of a home-price fall. http://ca.finance.yahoo.com/news/Canada-new-home-prices-hit-reuters-3894579805.html

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

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

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

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

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

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

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

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

PCF wasn’t concerned that I would pay the penalty and leave. Instead they wondered if I’d be interested in a line of credit? As readers know from my line of credit woes, that’s the last thing I wanted! I’m still paying the same rate, but the banks should be worried when I renew. I may well be able to self-fund through my RRSPs and leave them asking why they lost a “preferred” customer. http://www.moneyville.ca/blog/post/944882–how-i-saved-thousands-on-my-mortgage?bn=1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“The export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance” it said. http://ca.finance.yahoo.com/news/Bank-Canada-keeps-short-term-capress-3272240631.html?x=0

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There were some downside surprises in Monday’s data as well. Inventory buildup fell, unusual during a recovery, and business investment in new machinery and equipment was basically flat, although the previous three quarters had been strong. http://ca.finance.yahoo.com/news/GDP-jumps-signs-point-capress-1092036072.html?x=0

The average Canadian who files for bankruptcy owes $59,800 not counting his mortgage and is a 41-year-old married man with four credit cards, according to a report by a Kitchener-based bankruptcy trustee.

The information, released Monday by Hoyes Michalos & Associates, says this amount owed by the average bankruptcy filer is about three-and-a-half times more than the debt level of the average Canadian.

The report is based on an analysis of 8,000 insolvency filings the firm dealt with in 2009 and 2010 and offers a profile of men, women, and seniors.

“The current economic climate, combined with easy access to credit has increased the risk of insolvency for the average Canadian,” the report said. “It now takes more of each Canadian’s take-home pay to service the debt that they have accumulated. If anything interrupts the average person’s income, even for as little as a month or two, they find themselves unable to meet their obligations.”

The report, called Joe Debtor: The Face of Bankruptcy found:

58 per cent of those who file for bankruptcy are male and they take home $2,240 a month after tax, slightly less than the national average;

60 per cent are between the ages of 30 and 59;

The average bankrupt has credit card debt of $24,400, owes $13,800 to banks, $5,400 in back taxes, and has other debts worth about $16,200, owed to finance companies, payday loans, for student loans, and to family and friends;

The number of over-55s in financial trouble is increasing and their debts are greater.

The report takes aim at the assumption that people who file for bankruptcy are unemployed: in fact, the average insolvent person is working and earns close to the Canadian average of $2,419 per month.

“The principle difference between our debtors and the average Canadian is their debt,” the report said.

The report found that between 2008 and 2010 the average debt carried by those who file for bankruptcy increased 17 per cent. The largest increase was in credit card debt – which grew by about one-third.

“The recent downturn in the economy, combined with job loss or income reduction, has forced more families to rely on credit to pay their every day bills,” the report said.

There has also been an increase in the number of people over age 55 who are snowed under by debt. In the same two years the portion in that age group rose to 16 per cent from 12.5 per cent.

“An increasing number of Canadians are entering retirement with debt,” the report said. “Another alarming trend is the increasing propensity of retired Canadians to assume more debt during retirement.”

On average, debtors in the 55-plus group owed about $74,000 in unsecured debt, including credit card debt of $37,000. Half of these debtors are living on their own but one-third still has a dependant at home. Their average take home pay was $2,133, well below the Canadian average.

Only one-third of older bankruptcy filers had RRSP savings and the average total value was about $30,000.

“Approaching retirement without a safety net savings, combined with higher debt levels, significantly increases the risks of bankruptcy,” the report said.

The profile of the average student debtor is a single female, 35, owing about $50,000 of which about $14,400 is student loans. She is also more likely to be divorced or separated and a single parent.

The firm’s research also shows that more than half of bankrupts admitted that they were overextended and mismanaged their finances, but that mismanagement was typically caused or dramatically increased by separation or divorce, job loss or personal illness.

“The difference between a bankrupt and a non-bankrupt may be as simple as this: the bankrupt lost his job, and the non-bankrupt didn’t. Or perhaps the bankrupt got divorced, or was off work for a medical issue, and the non-bankrupt wasn’t,” trustee Doug Hoyes said in an interview.

“If you want to predict whether you will have financial trouble in the future, ask yourself this question: If I lost my job tomorrow, how long would it take before I could no longer pay my bills?”

The report is sure to add to fodder to the ongoing national debate over Canadian household debt levels.

Two weeks ago, the Vanier Institute of the Family reported that average family debt has now hit $100,000, and that for every $1,000 in after-tax income, Canadian families now owe $1,500.

Some economists say the odds of a national crisis spawned by consumer debt are remote as the economy continues to recover and add jobs.

But the Bank of Canada has been sounding the alarm on household debt for months, warning that interest rates are now set to rise from record-low levels, and that may put some consumers at risk. http://www.therecord.com/news/business/article/494137–average-bankrupt-person-is-41-married-and-has-four-credit-cards-kitchener-study-says