Despite soaring mortgage lending, Canadian banks are strong enough to absorb any hit that might result from a potential real estate correction, said Ed Clark, chief executive of Toronto-Dominion Bank.

Unlike U.S. banks, lenders on this side of the border did not get involved in the kind of risky practices that helped drive the U.S. housing boom of the previous decade and that ultimately caused so much carnage when the crisis hit in 2008, Mr. Clark told shareholders at TD’s annual meeting.

Canadian banks didn’t require government bailouts and were able to go out into the markets and raise significant capital to fortify their balance sheets over the last few years.

If the housing market corrects, the big banks are strong enough “that they could absorb that hit,” he said.

In answer to a shareholder question, Mr. Clark acknowledged that there are “slightly different views” about where the housing market is headed, but he noted that “we all think that Canada is not at risk of a U.S.-style meltdown.”

Even if real estate does correct, the drop won’t be as severe as the U.S. experience and banks will be prepared to absorb any potential losses owing to their strong capital positions.

Bank of Canada Governor Mark Carney has warned that elevated consumer debt levels represent the biggest domestic risk to the financial system.

Mr. Clark said Canadian policy makers are faced with a “classic macro-economic dilemma” as they try to deal with quickly rising consumer debt levels. On the one hand there is a need to keep interest rates low to maintain the economic recovery but it’s those low rates that are causing consumers to go out and take on more debt.

Ottawa has been responding by tightening the rules around mortgage lending, most recently with the introduction of proposed new requirements around underwriting and disclosure from the Office of the Superintendent of Financial Institutions.

Mr. Clark said OSFI’s draft rules would need “some tweaks” to make them “practical and implementable,” but in general “we are doing the right thing” to make sure the situation doesn’t get out of control.”

Economists are pretty much in agreement that the Bank of Canada, while still maintaining its interest rates at a stimulus-level 1.00%, also adopted a more hawkish tone in its latest comments.

Mark Carney, governor of the central bank, highlighted an improving global economic outlook while also noting that household debt burdens have become the biggest domestic risk. Enough grist for the mill, certainly, for economists to begin speculating about Mr. Carney accelerating his plan to eventually raise rates again. At some point in the future. Possibly. (You know how it is).

While quite subtle, the associated rate statement signalled a possible lack of patience with the status quo,” Mark Chandler, head of Canadian fixed-income and currency research with RBC Capital Markets, said in a note Friday.

However, the real question is what Mr. Carney plans to do about the growing debt problem.

“Over the past couple years, the presumption had been that household debt accumulation was largely a sector-specific problem tied to housing prices and associated mortgage credit growth,” Mr. Chandler said.

Problem was, direct measures introduced in the past two years, including lowering the maximum amortization period to 30 years and requiring borrowers to qualify for at least a five-yeare fixed-rate term even if they choose a lower rate or term, have been largely ineffective at pushing the debt needle back.

“One can argue that additional capital requirements should be part of the solution (as per Basel III) but financial institutions are already scrambling to build core capital requirements required under the new rules,” he said. “If the macro-prudential tool is unavailable, the burden could (or should) fall to monetary policy.”

On the other hand Sheryl King, Canada economist with BofA Merrill Lynch, argues against a rate hike due to its likely negligible impact on bond yields, which are used by the banks to determine mortgage rates. Bond yields have been weak ever since investors, fearful of roller-coaster equities in the wake of the financial crisis, have been flocking to fixed income for guaranteed yield.

“The more effective and direct policy tool for the mortgage market, in our view, is tighter regulation,” she said.

For example, if Canada further reduced its maximum amortization period to 25 years from 30, it would be the equivalent of a 95 basis-point rise in the five-year fixed rate mortgage.

The U.S. Federal Reserve, which faced a similar conundrum under the stewardship of Alan Greenspan between 2004 and 2006, was only able to achieve similar results through a 400 bps increase in the rate, she said.

Fixed-rate mortgages are at historic lows but if you are locked in to a contract with your bank, those benefits may be yet elusive.

First you have to do the math to see if breaking your contract is worth the penalties you may face.

“There is no grey area,” says Cindy David, a certified financial planner at Dupuis Langen Financial Management Ltd. in Vancouver. “It’s either worth it or it’s not.”

The big five banks are offering four and five year mortgages at just 2.99%.

“We’re even seeing 10-year fixed rate mortgages at 3.99%,” says Ms. David. “Think about that: Interest and principal at 3.99% for 10 years. From a financial planning perspective if any client approached me and said ‘Should I look into breaking my mortgage?’ My answer would be yes.”

Step one comes down to meeting with your financial institution and doing the math to determine whether or not the cost of breaking your mortgage is worth the anticipated savings from the lower rates. The fact is the penalty for breaking a mortgage can be thousands of dollars and in many cases, the cost and the future savings cancel each other out, in which case you may be wise to wait until your mortgage is up for renewal

OTTAWA • The federal government and some of the country’s leading economists remain worried about Canada’s housing market and rising household debt, and are cautioning Canadians against borrowing too much.

However, they are more optimistic about the overall state of the Canadian economy than they were just last fall, and now project stronger-than-expected economic growth in 2012.

Finance Minister Jim Flaherty met Monday with 13 private-sector economists for his traditional pre-budget consultation to get their assessment of the economy as Ottawa prepares to deliver the federal budget on March 29.

Mr. Flaherty and a handful of the economists said they continue to be concerned about household debt levels in Canada and a somewhat overheated housing market — especially on condominiums. The Minister was also cautioned about cutting more than $4-billion in annual spending that the government first identified last year.

Some of the big banks are suggesting the federal government also consider implementing “measured actions,” such as reducing the maximum amortization period for mortgages back to 25 years and increasing the minimum down payment, possibly to 10%.

“There has been some moderation in the housing market. I remain concerned about the condo market, quite frankly,” Mr. Flaherty told reporters after his one-hour meeting in Ottawa.

“I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because (interest) rates will go up some day.”

The Minister, however, noted there’s a “divergence” in opinion among the economists, as some expressed more concern than others about the state of the housing market.

Avery Shenfeld, chief economist at CIBC World Markets, echoed some of Mr. Flaherty’s worries and said that while there are signs the housing market is cooling off, there’s still cause for concern.

“There’s a general feeling that, more than just the condo market, the Canadian housing market is starting to get a little bit overdone in terms of price momentum,” Mr. Shenfeld said.

He noted the Canadian economy in 2012 is likely to expand a few decimal points more than the 2.1% growth in real gross domestic product that was predicted in November’s fall economic update.

“It’s fair to say that some of the risks we were worried about last year don’t seem quite as shocking as we go into the current year,” Mr. Shenfeld said.

The federal government bases its budget and economic projections on the average forecasts of private-sector economists it regularly consults. The economists said they’re waiting a few more days for the most recent GDP figures to trickle in before releasing an updated average.

Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said he also is worried about the state of the Canadian housing market and would like the government to consider reducing the maximum amortization period to the traditional 25 years from the current 30 years.

Increasing the minimum down payment to 10% from the current 5% is another option, he said, but one that must be carefully considered.

“I do believe that there is some scope to take some further measured actions. I am concerned about the condo market quite a bit,” Mr. Burleton said.

Reducing the maximum amortization to the traditional 25 years wouldn’t generate any drastically negative impacts, he said. The government had increased the maximum period to 40 years, but slowly ratcheted it back over the past few years to the current 30 years.

Mr. Burleton also noted borrowing trends have picked up in recent months after a cooling-down period, and is worried the uptick will continue.

Douglas Porter, deputy chief economist at BMO Capital Markets, cautioned the government against searching for more than the $4-billion in annual cuts the Conservatives identified in last year’s budget.

The Harper government’s program review is searching for a minimum $4-billion — and up to $8-billion — in annual savings over the next few years, but Mr. Porter said the government should tread carefully.

“I would not advocate for the federal government to ramp up the pace” of cuts beyond what was already announced in last year’s budget, Mr. Porter said, adding federal finances are now in better shape.

“There is not a push from the financial markets for the federal government to do any more than what’s already scheduled.”

However, Mr. Porter is not as skeptical of the Canadian housing situation, saying the markets remain fairly well-balanced across the country.

“I don’t get the impression that the housing market has been particularly overdone,” he said.

Posted in: Economy  Tags: Canada economy, Jim Flaherty

Three annoying things that banks do to customers are about to become history.

Following up on commitments made in the past two budgets, the federal government has announced measures that will stop banks from mailing unsolicited credit card convenience cheques to customers, and that will reduce the holding period on newly deposited cheques. The banks will also have to stop being so secretive about the penalties clients must pay when they want to get out of a mortgage early.

These measures represent some good work by a government that has been under pressure lately as a result of the robo-call affair. Strangely, the measures were announced on a Sunday and thus didn’t get the initial attention they deserve.

The sharp decline we’ve seen in mortgage rates over the past few years has prompted many people to think about breaking their mortgages in order to lock in lower borrowing costs. A mortgage penalty must generally be paid in this situation, but it’s exceedingly difficult to find out how much it is and how it’s calculated.

The government said in its 2010 budget that it would standardize the calculation and disclosure of mortgage penalties. The measures just announced don’t address the fact that mortgage lenders use different methods to calculate penalties, some of which hit borrowers harder than others. But they do require banks to:

• Annually show customers how they can pay off their mortgages faster without incurring prepayment charges.

• Provide online mortgage penalty calculators.

• Offer a toll-free phone line that customers can call to talk to bank staff about mortgage prepayment penalties and find out the actual charge that would apply.

• Disclose the details of how actual mortgage prepayment penalties are calculated (example: whether three months’ interest is being used, or a calculation called the interest rate differential that looks at how much interest a bank is losing out on if you break your mortgage).

These rules will be introduced over the next six to 12 months or so, and they apply specifically to new mortgages. The Department of Finance says the measures will be applied to existing mortgages “where it is feasible to do so.” Business mortgages are not covered.

Improved disclosure of penalties will make life easier for borrowers who want to get out of a mortgage before the renewal date. “I can’t tell you how many borrowers call us to say, ‘How can I figure out my penalty?’” said Vancouver mortgage broker Robert McLister. “We generally have to tell them to call their lender, and then they have to endure a sales pitch from the lender – why are you leaving and things like that.”

The new mortgage regulations will require banks to show how they arrive at a mortgage prepayment penalty. However, they don’t standardize the calculation method. As it stands now, some lenders are more punitive than others with their penalties. For example, mortgage broker Jim Tourloukis said some lenders will calculate a penalty of three month’s interest based on the actual interest rate a client has, while others will use the higher posted rate that almost nobody pays.

“Without a doubt, the calculations should be standardized,” Mr. Tourloukis said. “It’s a dog’s breakfast right now.”

The government’s ban on the distribution of unsolicited credit card convenience cheques will come in proposed regulations to be published for consultation in the weeks ahead. Let’s hope there’s no slippage on this file because credit card convenience cheques exist to prey on people who can’t handle credit (here’s a column I wrote last fall on these cheques.)

Some key negatives: These cheques allow you to draw on your credit card balance for things that you can’t usually pay for with plastic, like rent or utility bills, and using them is like taking a cash advance on your card. That means you forgo the usual interest-free grace period credit cards offer.

The new rules for cheques take effect Aug. 1. They’ll limit banks to a four-day hold on newly deposited cheques of less than $1,500, which is down from five to seven days right now in many cases. Also, banks will have to provide immediate access to the first $100 deposited in a branch; for cheques deposited by bank machine, access to the first $100 would come the next business day.

That’s three annoying bank practices addressed by Ottawa. Suggestions for future government investigation: Aggressive marketing of bank mortgage life insurance, high dormant-account fees and branch staff who are called financial planners but only flog mutual funds.

Canadians will have to wait another month before finding out how the Conservatives will change Old Age Security and cut federal spending, as Finance Minister Jim Flaherty confirmed his 2012 budget will be released March 29.

Even then, after months of hints and suggestions about what may be on the chopping block as Ottawa moves to erase its estimated $31-billion deficit, there will still be questions about what is being cut.

Last March, the Conservatives launched a year-long process called the Deficit Reduction Action Plan, led by a special subcommittee of cabinet that scoured through hundreds of proposed cuts from all federal departments. The 2012 budget was billed then as the unveiling of that work.

But Mr. Flaherty said his budget will not include “intricate detail” about where the axe will fall.

“The budget would have to be a 1,000 pages if we did that,” he said. “But there’ll be enough information that it’ll be comprehensible, that it will describe what we’re doing in terms of the Deficit Reduction Action Plan, and much more than that. This is a jobs and growth budget.”

He and other ministers have been playing down expectations lately, describing the government’s restraint plans as modest.

The budget will also reveal how Ottawa will phase in changes to Old Age Security, which the government says is needed over the long term to make it financially sustainable.

Mr. Flaherty promised the budget will nonetheless lay out a comprehensive plan for meeting the government’s target of eliminating the deficit by the 2015-16 fiscal year. The minister said it’s possible Ottawa could “do a bit better,” which could mean a balanced budget by 2014-2015. That later target is what the Conservatives announced during the 2011 election campaign, but Mr. Flaherty pushed that back by a year last November on the grounds that economic growth was coming in lower than expected.

NDP finance critic Peter Julian accused the government of trying to “hide the facts from the public” and said the minister’s actions are the exact opposite of Conservative campaign pledges to act transparently.

Liberal finance critic Scott Brison said that he recently urged Mr. Flaherty in a private meeting to be transparent about the budget cuts. He expressed disappointment that the minister’s comments suggest that won’t happen.

“It’s regrettable, but it’s not surprising,” Mr. Brison said.

Public-sector unions are warning that more than 100,000 public- and private-sector jobs could be lost as a result of federal spending cuts, a claim Mr. Flaherty dismissed as “outrageous.”

Police were ramping up security on Parliament Hill in advance of a union-led national “day of action” Thursday to protest federal spending cuts.

Mr. Flaherty told reporters unions have been protected during difficult economic times and that it was “realistic” to “ask the public service to participate in the belt-tightening.”

There is disagreement among economists over how quickly Ottawa should move to eliminate the deficit, with some worried that too aggressive an approach might drag down a fragile recovery. Finance Canada’s monthly tracking suggests the deficit for the current year will come in at about $25-billion, beating the minister’s November estimate of $31-billion.

But a broader public is more bullish on cuts. A poll by Nanos Research released this week showed that 74 per cent of those surveyed want to see cuts that exceed the 5-per-cent minimum the Conservatives have set as each department’s target.

The last week in March is later than usual for a budget, but Mr. Flaherty has said he wanted to give himself time to see how the Greek debt crisis plays out in case it creates a shock to the global economy.

The last week of March could be budget-heavy. Ontario Finance Minister Dwight Duncan also plans to bring down his budget that week, which could provide interesting contrasts as to how each government tackles its fiscal challenges.

“In theory it would be possible” that Ontario releases its budget the same day as Ottawa, Duncan spokeswoman Aly Vitunski said. The province usually releases its budget on a Thursday, but “it doesn’t have to be,” she added.

TORONTO – Expectations are muted as Canadian banks get set to report first quarter earnings starting Tuesday, with results likely to come under pressure on a number of fronts, from slowing consumer loan growth and choppy capital markets to stricter regulations.

But the main concern is the banks’ exposure to ballooning consumer debt and the drumbeat of warnings from Bank of Canada Governor Mark Carney on down about the dangers of over leverage and the risk that has created for the whole economy.

Given the still-steady housing market, it’s probably not a problem in the first quarter or possibly even the current year, but nevertheless investors will be closely scrutinizing results when they come out this week for signs of where things are headed.

The good news is that lenders have mostly laid off the risk by ensuring their mortgage portfolios — the biggest single asset on bank balance sheets — through the Canada Mortgage and Housing Corp.

But they are not entirely protected. There remains significant potential for collateral damage in terms of falling credit card and other borrowing that could result from a housing correction.

Consumer borrowing has been a key source of strength for the sector for the past decade, so any decline — especially when other earnings drivers such as capital markets are showing signs of weakness — would be bad news for the sectors.

Another theme likely to get plenty of attention is expense reduction. In the face of shrinking revenue, players’ natural response is to cut overhead, and they’ve been doing that for the past several months, with Bank of Montreal revealing last week it laid off 60 employees from its capital markets business.

BMO kicks off the season on Tuesday, followed by Royal Bank of Canada and Toronto-Dominion Bank on Thursday. National Bank of Canada comes out Friday, with Bank of Nova Scotia on March 6 and Canadian Imperial Bank of Commerce wrapping things up on March 8.

UBS analyst Peter Rozenberg is calling for a 0.5% drop in earnings for the group compared to the first quarter of 2011 because of moderating loan growth and lower profit margins.

John Aiken, an analyst at Barclays Capital, expressed a similarly bearish view, pointing to “slowing consumer spending” which he said will likely have “a significant impact on the banks’ ability to grow revenues.”

As players increasingly focus on retail banking for profit growth, they’ve been forced to compete harder than ever for customers, resulting in falling net interest margins (NIM), the difference between lenders’ cost of funding and the interest they charge customers.

Mr. Aiken warns this phenomenon of declining NIMs is a major concern.

In the first quarter of last year the banks had an average NIM on their domestic retail operations of about 3.5%, but that is expected to come in at just over 2.5%, a drop of nearly a full percentage point, he said.

“Given a prospect of continuing low interest rates and the now full-bore effort to de-leverage both banks and their retail customers that have provided the bulk of recent revenue and earnings growth, revenue advances will in our view be a key leading indicator of future shareholder value potential,” said Stonecap Securities Inc. analyst Brad Smith.

While there doesn’t seem much to look forward to here, it’s also true that we’ve been here before.

Or at least, the picture we see today looks a lot like the one we were presented with going into the first quarter of last year, with analysts warning of tumbling capital markets profits and a possible housing correction.

But instead it was actually a pretty good year, with at least two players — RBC and TD — putting out record adjusted earnings as Canadian households continued to borrow even while they socked savings into bank mutual funds.

Indeed, Moody’s Investor Services predicted on Friday that household spending will remain “a key support to Canadian growth” in 2012 with sales remaining “on an upward trend.”

“A sudden, unexpected drop in house prices could prompt a drop in consumer leverage and in consumers’ ability to spend,” Moody’s said, adding that it does not believe such a correction is in the cards for 2012.

“Our baseline forecast does not assume a sharp correction in house prices,” the rating agency said.

Financial Post

OTTAWA — Years of rising consumer debt are coming home to roost, forcing Canadians to rethink traditional plans to retire by age 65.

Most Canadians now expect to work past 66, as only 30% think they will be able to fully retire by that age, according to a poll conducted for Sun Life Financial Inc.

Debt appears to play a big role in that equation, with 47% of those surveyed saying they are worried about the debt they’ll be dealing with as retirees.

And while many Baby Boomers have said they will work into their retirement years simply because they want to, the majority of those polled — 61% — said they will do it because they have to.

In some cases, people said they will have to work longer simply to be able to pay for basic living expenses.

“Canadian retirement expectations are changing,” said Kevin Dougherty, president of Sun Life Financial Canada. “These results are not surprising given the current economic volatility, increasing consumer debt loads, rising health-care costs, longer life expectancy and lack of planning.”
At the same time, the federal government is looking to reform the retirement income system, including possibly pushing back the qualifying age for Old Age Security from 65 to 67.

Despite economists’ objections that the system is sustainable, Human Resources Minister Diane Finley insisted this week that inaction threatens future pension benefits and that reforms will be announced in the coming spring federal budget.

In the meantime, Canadians’ debt continues to climb.

The most frequently quoted measure of consumer debt — debt to personal disposable income — soared to a new record high of 152.98% in the third quarter. That means Canadians carry $1.53 in debt for every dollar they bring home, a fact that has drawn repeated warnings from Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney.

While the larger part of that debt exists in the form of mortgages, average consumer debt excluding mortgages has also been rising steadily for six and a half years, climbing from $18,958 in the first quarter of 2007 to $25,960 in the fourth quarter of 2012, a new record, according to a report from credit-data firm TransUnion.

That report shows consumer debt including credit cards, lines of credit, auto loans and consumer loans rose 1.4% in the fourth quarter — a seasonal pattern that accompanies the Christmas shopping period — after either declining or remaining stable in the previous three quarters.

The one silver lining in TransUnion’s report is that on an annual basis, the rise in consumer debt slowed to a pace of less than 1% in 2011, a level not seen since the company first began tracking the data in the first quarter of 2004.

“The continued deceleration in the annual growth of total debt is the bigger story,” said Thomas Higgins, TransUnion’s vice-president of analytics and decision services.

“We had witnessed a stabilization of total debt for the last three quarters, and the first and second quarters of 2012 should be quite revealing as we may see the first year-over-year decline in total debt since at least 2004.”

To cope with increasingly challenged retirement plans, Canadians surveyed by Ipsos Reid for Sun Life now say they expect retirement to be something they enter gradually, rather than simply giving up their careers all at once.

“Interest in phased retirement has been growing,” said Ian Markham of Towers Watson, a human resources consulting firm, in the statement released with the poll results.

Of those surveyed, 43% said they’ll start to phase in their retirement between the ages of 60 and 65, working either part-time or freelance before they fully give up work.

Twenty-one percent said they hoped to start retirement between the ages of 50 and 59. But there were 8% who only expected to start pulling back from work between the ages of 66 and 70.

Ipsos Reid conducted the online poll between Nov. 29 and Dec. 12, and involved 3,701 working Canadians between the ages of 30 and 65. Ipsos weighted the results to make them reflect Canadian demographics. A survey with an unweighted sample of this size and a 100% response rate would have an estimated margin of error of 1.6 percentage points, 19 times out of 20, according to the poll.

Postmedia News

A one-month pop in gasoline prices propelled Canada’s annual inflation rate up two notches to 2.5 per cent in January, reversing a recent trend toward moderating consumer price increases.

Pump prices climbed 2.8 per cent last month, partly due to political instability in the Middle East, contributing to upward pressure on both the monthly and annual indexes tracked by the Statistics Canada.

The agency said consumer prices overall were half a point higher in January on a seasonally adjusted basis than they were in December, almost totally reversing last month’s sharp 0.6-per-cent decline — both movements coming mostly from fluctuations in the price of gasoline.

As well, underlying core inflation — which excludes volatile items such as some fresh food and gas — rose to 2.1 per cent, one tick higher than the Bank of Canada’s target.

Analysts had expected the monthly and annual measures to rise, but not as sharply as occurred.

Besides the climb in gas prices during January, economists were expecting the one-point increase in the Quebec sales tax that went into effect on Jan. 1 to provide a small boost.

Another key contributor to inflation remains food, which in January cost 4.2 per cent more than a year ago, although food prices continue to moderate.

Excluding those two items, inflation would be a tepid 1.6 per cent, the agency said.

That is likely to give the Bank of Canada comfort that inflation remains well in control despite the persistent above-target readings. The central bank forecasts inflation to fall to about 1.5 per cent by mid-year.

Overall, seven of the eight major price components that Statistics Canada tracks registered increases in January, the lone exception being recreation, education and reading.

Transportation rose 3.7 per cent on an annual basis, shelter costs increased by 2.1 per cent, household operations were higher as were clothing and footwear, and alcoholic beverages and tobacco. The rising cost of food was punctuated by a 9.9-per-cent annual increase in bread, 8.3 per cent in fresh vegetables and a 6.5-per-cent hike in meat prices.

Not all items cost more in January, however. Furniture cost 3.6 per cent less last month than a year ago and video equipment dropped 9.7 per cent. Mortgage interest costs and travel tours were also slightly less expensive.

Most of the inflation occurred in Ontario and Quebec, at about half a point each, with the other provinces seeing relatively flat pricing.

Regionally, annual inflation was highest New Brunswick at 3.2 per cent last month and lowest in British Columbia, at 1.7 per cent.

The hot housing market that powered the country’s post-recession recovery is slowing to a crawl.

The Canadian Real Estate Association said sales dropped and prices moderated in January, with the weakness spread among more than half of the country’s cities. Sales in Vancouver and Toronto slowed to a crawl, with few houses available to would-be buyers.

The low number of listings means there could be a rush of sellers trying to capitalize on the spring market, keeping a lid on the bidding wars that have driven prices sharply higher in some of the country’s largest markets.

“There is really a lack of product,” said Phil Soper, president of Brookfield Residential Real Estate Services, which operates Royal LePage. “We expect that to pick up considerably, and by the end of March Break you’ll really be able to gauge the Canadian market’s health. Or lack of health.”

Canada’s sizzling property market has made headlines around the world, and so far defied some predictions that it’s a debt-fuelled bubble bound to pop. Forecasts for home prices for the next several years vary wildly – with economists and analysts predicting everything from a 25 per cent drop to modest gains.

The latest figures suggest a levelling off. Home sales across the country were down 4.5 per cent in January from December, the sharpest monthly decline since July, 2010.

Average prices were 2 per cent higher than a year ago at $348,178, the smallest year-over-year increase in the past year.

It’s not the first sign that the much-talked-about slowdown may have arrived.

The Teranet-National Bank index, an alternative measure of price gains that lags CREA by several months, showed prices dipped 0.2 per cent in November, marking the first drop since the fall of 2010.

In Toronto, the bidding wars have largely given way to a market where houses sit longer and sell for closer to their asking price, said Richard Silver, president of the Toronto Real Estate Board. But hot neighbourhoods continue to fetch top dollar, especially considering the lack of listings.

Matthew Slutsky, chief executive officer of real estate site BuzzBuzzHome.com, has been trying to buy a house in one downtown neighbourhood for months. Along with his wife Carlie Brand, he’s been popping letters in mailboxes imploring their owners to consider a sale.

“I really hope it’s the calm before the storm and more listings pop up,” he said. “Right now it feels like we are auditioning for a house, and I don’t know if I want to wait and see what happens in the spring.”

There’s been a sense of unease surrounding Canada’s housing market for more than a year. The federal government tightened its mortgage qualification requirements to try to prevent buyers from taking on too much debt in a low-interest-rate environment, and the Bank of Canada has issued a steady stream of warnings about high levels of household debt.

The fear is that rates will rise as the economy improves, and many people who could afford their house when interest rates were low may find those same houses unaffordable as rates rise. Financial turmoil in Europe also has many market watchers concerned, with any default in Greece expected to have ripple effects around the world.

Lenders such as Gerry Soloway, CEO of Home Capital Corp., have cautiously tightened their lending standards in recent months as the economy wobbled. But he doesn’t see prices crashing any time soon, even if things slow down considerably.

“I just don’t see the catalyst for a big price drop,” he said.

It’s a theory echoed by Ross McCredie, CEO of Sotheby’s International Realty Canada, who recently had 16 buyers check out a $2.5-million home in Toronto.

“We are finding if the home is priced right and a quality home, it is moving fairly quick,” he said. “Too many people who are listing are expecting prices well above the market. We are spending a lot of time with our agents to ensure we are only taking on listings at the right price.”