Bank of Canada Governor Mark Carney and other policymakers have no doubt been scaring the pants off consumers who have loaded up on debt like there’s no tomorrow. Well, there is a tomorrow, and that was their aim. 

But while the risk of overweight debt levels is a “significant” one to the economy, the effects of the inevitable rise in interest rates should not be overestimated, National Bank Financial says in a new report.  

Carney has warned repeatedly that household debt levels are too high, and Finance Minister Jim Flaherty recently tightened up the mortgage market again. This came as the ratio of household debt reached a whopping 148% of disposable income – a level higher than in the US. 

“It’s not that Canadians are throwing money out the window,” said Yanick Desnoyers, Assistant Chief Economist at National Bank Financial. “Rather they are buying more houses, taking the homeownership rate to a record 70%. Since very few homebuyers pay cash, the resulting indebtedness is hardly surprising.”

Click here to read more in the Globe and Mail.

Any move by the Bank of Canada could “easily” cause house prices to collapse, Capital Economics warns in a bleak report that suggests the Canadian housing market is likely to suffer the same sort of crash that has plagued countries such as the United States.

The report released Thursday suggests that house prices in Canada have climbed at the same pace as that in the United States, but have not fallen at the same rate. In the United States, some markets have seen prices fall as much as 50 per cent through the recession.

As the central bank raises interest rates, mortgages will become more expensive for Canadians. Add inflation to the mix, and Capital Economics predicts prices could fall 25 per cent over the next few years.

“Even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances as they can change perceptions towards the housing market very quickly,” said economist David Madani. “If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.”

Other market watchers expect higher rates to hinder price gains, but few are calling for as sharp a drop. The Canadian Real Estate Association expects sales to fall 9 per cent this year, for example, but prices are only expected to drop 1.3 per cent. It hasn’t issued a forecast beyond 2011.

The country’s bank economists have varied short-term forecasts, but there are no expectations among the largest forecasters that a crash is even likely.

Some have suggested drops of 10 per cent may be in order next year as mortgage rates move higher and households struggle to service record debt loads, and the Bank of Canada specifically mentioned the prospect of “a more pronounced correction in the Canadian housing market” as one of three key risks to the country’s economy.

However, sales data from the fall market showed that fewer houses have been listed and prices were largely unchanged from a year ago.

Capital Economics’ chief concern is that as the central bank raises rates, variable rate mortgages become more expensive and homeowners could find themselves priced out of their homes.

Fixed rate mortgages are tied to government bond yields, but would move in the same general direction. If a homeowner is already stretched financially, any hike could prove problematic.

However, a survey released by the Canadian Association of Mortgage Professionals released late last year showed that Canadians are confident they could shoulder higher mortgage payments without too much difficulty, with 84 per cent saying a $300 monthly increase was no problem.

If prices do fall as far as he predicts, “the knock-on effects to consumer spending and housing investment could be significant and perhaps even strong enough to push the economy into another recession.”

In January, the federal government shortened the maximum amortization period for mortgages to 30 years from 35 to help Canadians take on less debt at a time when it is at record highs.

While most private sector watchers expect the market to pull back in the second half of this year after a strong two-year run, the Capital Economics call for a 25 per cent drop is the harshest.

After hitting record highs in May, the Canadian market did slow across most of the country through the summer. Recent data from the Canadian Real Estate Association has many economists predicting a “soft landing,” however, with activity returning at a lower level and prices holding steady rather than rocketing higher each month as they have through the recovery.

Canadians are less optimistic about the outlook for the national economy and their personal financial situation in 2011 than they were last year, according to the January 2011 RBC Canadian Consumer Outlook Index (RBC CCO). Less than half (43 per cent) of Canadians feel the economy will improve over the next year, a marked decline from the 56 per cent reported in last January’s RBC CCO. In addition, only 38 per cent of Canadians now feel their personal financial situation will improve over the next 12 months, compared to 45 per cent a year ago.

The prevailing mood was reflected in the tight rein many Canadians kept on their expenses over the past holiday season, with 67 per cent responding that they managed not to overspend their holiday budgets. Of this majority, 28 per cent reported they had kept track of their spending by making a budget and sticking to it; 26 per cent stated they knew how much they had to spend and “once the money was gone, that was it”. By far, the largest number of respondents (46 per cent) said that they stayed within their budget because they didn’t want to go into debt or increase their debt load.

“We know that managing debt is top of mind for Canadians. Having a budget in place that you can stick to is one of the best ways to keep your finances in balance and take care of any debts,” said Ashif Ratanshi, head, Branch Investments, Deposits and Direct Investing, RBC. “This also gives you a good base from which to do your financial planning for the year. Ideally you want to ensure you are saving money for your future as well as covering your expenses today. Good financial advice can help you do both.”

Despite the cautious economic outlook expressed by the majority of Canadian respondents, there are indications that Canada’s economy will continue to grow in 2011 and 2012.

“While the pace of the recovery will remain moderate, we are projecting growth of 3.2 per cent this year and 3.1 per cent in 2012, representing the fastest pace of growth over the past four years,” noted Craig Wright, senior vice-president and chief economist, RBC. “As the economy continues to expand, we expect interest rates to drift moderately higher through the coming year. This should limit pressure on household balance sheets in an environment of continued employment gains.”

Tighter inventory levels helped to make the last decade one of the healthiest periods on record for Canadian real estate, insulating markets in major centres from the peaks and valleys characteristic of past decades, according to a report released by RE/MAX.

The RE/MAX Housing Barometer Report measured monthly sales-to-new listings ratios in 18 major centres across the country from January 2000 to December 2010. The report found strong seller’s/balanced conditions prevailed for much of the timeframe, prompting significant gains in housing values. The lone exception was when the market dipped into buyer’s territory during the latter half of 2008 and early 2009. But fewer listings served to offset diminished demand and provided greater stability. 

Average price increases from 2000 to 2010 ranged from an annually compounded rate of return of 4.82% in London-St Thomas to a high of 9.56% in Regina. The national average was 6.82%. By far the tightest market in the nation was Winnipeg, where sellers ruled the roost for 85% of the decade, followed by Hamilton-Burlington (67%), Regina (63.6%), Kitchener-Waterloo (59.8%) and Edmonton (57.5%). 

Housing markets have been remarkably hearty over the past decade and the stage is set for a better than expected 2011. Inventory has proven to be an effective form of market self-regulation, providing both an ideal climate for price escalation and a shelter in periods of softer home-buying activity. As a number of city centres are already reporting stronger than usual activity out of the gate, it’s clear supply will continue to be the wild card in 2011.

 Click here for more details from RE/MAX.

The Canadian Real Estate Association has raised its sales forecast for the rest of the year, calling for a smaller decline than it originally expected as low interest rates keep buyers in the market. 

The association now expects sales to fall by 1.6% in 2011, compared to its November call for a drop of almost 9%. Prices are also expected to do better than forecast, with a gain of 1.3% instead of a slight decline. 

 “The hand-off going into 2011, together with the highs and lows for sales activity posted in 2010, provided guidance for CREA’s revised forecast,” said Chief Economist Gregory Klump. “The announcement of the new changes to mortgage rules will likely bring forward some sales into the first quarter that would otherwise have occurred later in the year.” 

 For 2012, CREA expects sales to slightly outpace 2011 and prices to advance by another 1.3%. The forecast is at odds with a recent report by Capital Economics, which said prices could fall by 25% in the next three years as interest rates rise. Several Canadian banks raised their mortgage rates by 25 basis points this week. 

Click here to read the full Globe and Mail article.

As consumer debt levels soar and baby boomers approach retirement, the federal government is looking at adopting a long list of measures designed to prod Canadians into making smarter financial decisions.

The measures recommended by a federal task force cover a wide range of initiatives. Employers who offer pensions would be required to automatically enrol employees and escalate their contributions, so that employees would have to opt out rather than opt in. Financial institutions would be forced to simplify and improve information available about everything from mortgages to mutual funds. Tax breaks would be offered for workplace financial literacy programs, and students would be taught more about debt if they take out a student loan.

Click here for the full Globe and Mail article.

You think you know that, right? With Monday’s announcements that TD Canada Trust and CIBC are raising some of their fixed-term mortgage rates by as much as one-quarter of a percentage point, let’s see if you do.

Rising rates will make affording a first home much harder – so much so that you’ll pay more even if housing prices decline. Higher mortgage costs will also shrink the cash flow of families that stretched to buy a home but were getting by in a low-rate world – potentially by thousands of dollars a year. 

People looking for a home face astronomically high prices in some cities, but they benefit hugely from very low mortgage rates. What a dilemma these people face – buy now to lock in manageable borrowing costs for a while, or risk higher mortgage rates while hoping for housing prices to fall. 

Click here to read more in the Globe and Mail

North American consumers are starting to feel better about their personal finances and the economy, a hopeful sign for the still fragile recovery.

Two fresh surveys, one by the Conference Board in Canada and another from the International Monetary Fund in the U.S., detected an identical pattern of rising confidence in January, although relative optimism continues to be stronger north of the border.

Canada’s confidence index rose 7.1 per cent this month to 88.1 points, the highest since the initial optimism coming out of the recession in the latter half of 2009 and early 2010.

Overall, the U.S. measure still lags Canada but in January it reached its highest level in eight months, rising to 60.6 from 53.3 in December, according to a Conference Board survey there.

Releases from both the IMF and the Conference Board note that levels are still below what would be considered positive, although they are improvements over recent months. Analysts generally welcomed the stronger consumer sentiment.

“In all, better consumer expectations in January bode well for a continued upturn in consumption…which will in turn prove supportive of overall economic activity,” said Martin Schwerdtfeger and economist with the TD Bank.

The increases follow a month of generally more upbeat economic news, particularly in the U.S., which has seen the early stages of an employment recovery and strong manufacturing activity.

But Conference Board of Canada economist Pedro Antunes said while positive news played a part, both in Canada and the U.S., there is also a predictive element to the surveys.

“This is really about looking ahead…and people are a little more optimistic,” he said.

Still, some economists cautioned against reading too much into surveys — for instance, whether more upbeat consumers will translate into more sales of homes, cars and appliances.

“It’s actions that speak louder than words,” said Scotiabank economist Derek Hold. “The way people manage their money and spend can be very different from how they say they will.”

While conditions appear to be improving, that comes after last year’s summer period faced generally downbeat news, when Canada’s recovery slowed to one per cent and the U.S. became so weak both the central bank and the government launched a second round of stimulus measures.

On Monday, the International Monetary Fund gave a modified thumbs up to the global recovery, while noting that advanced countries, including Canada and the U.S., will continue in the slow-growth lane for the next two years.

The IMF predicted Canada’s growth will average 2.3 per cent this year and 2.7 per cent in 2012 — one-tenth of a point less than the Bank of Canada’s estimate of the previous week. The U.S. will grow by three per cent and 2.7 per cent in the next two years, largely thanks to stimulus, the Washington-based financial institution said.

Both countries will get a better measure on how their economies are progressing in just over a week’s time when employment figures for January are released.

Canadians’ rising confidence was seen across a range of measures, but not uniformly across the country.

One of the clearest signals was that 28.1 per cent of respondents said they expect their financial situation to improve in the coming six months, up 3.3 percentage points. The number who felt the next six months looked worse, dropped by 0.7 point to 15.1 per cent.

The respondents were also more confident about Canadian labour markets, with those who felt job opportunities would increase over the next six months rising 1.4 percentage points, while those who felt conditions would get worse falling 2.7 points.

There was also a clear signal that more respondents felt good about making a major purchase, although the optimistic camp and pessimistic group each represented about 44 per cent of respondents.

“Whether this sudden improvement on the major purchases question can be sustained remains to be seen. But, coupled with the increasing optimism about future employment opportunities, it does suggest healthy consumer consumption going forward,” the Conference Board said.

Regionally, confidence rose the strongest in Ontario and the Prairies. Quebec registered a modest increase and British Columbia and Atlantic Canada were slightly less optimistic than they were in December.

The Canadian finding is based on the result of over 2,000 interviews conducted between Jan. 6 and 17. The margin of error is estimated at plus or minus 2.2 percentage points.

The risk of mortgage rates rising to unaffordable levels in the near future is “negligible” and recent measures taken by Ottawa to clamp down on housing loans may be too harsh, says Canada’s mortgage industry association.

Due to the effect of tightened lending rules “housing demand at present and for the near future is probably lower than it needs to be,” according to the Canadian Association of Accredited Mortgage Professionals, which represents brokers and others in the industry.

In fact, the group suggested in a report Wednesday that the rules may need to be relaxed.

CAAMP said that a vast majority of borrowers studied had left themselves room to absorb a hike of as much as one percentage point on fixed-rate mortgages and even more on variable-rate mortgages.

“Canadians — lenders and borrowers — have been highly prudent in the mortgage market,” Will Dunning, the association’s chief economist, wrote in the report.

“There have been some calls for mortgage lending criteria to be tightened further. This analysis concludes that Canadian lending criteria are already tight enough. In fact, some might argue that with the changes implemented in April 2010, Canadian criteria are currently too tight.”

The report came two days after federal Finance Minister Jim Flaherty further altered lending rules to curb higher-risk borrowing in the housing sector. Changes coming into effect in March include reducing the maximum amortization period to 30 years from 35 for insured mortgages and limiting how much money Canadians can borrow using their homes.

It was the third time mortgage rules have been tightened in the past three years, a period in which historically low interest rates have been fuel for rampant borrowing.

On Tuesday, Bank of Canada governor Mark Carney left the key overnight lending rate untouched at one per cent, but with a renewed warning that household debt is mounting.

Both Carney and Flaherty have warned repeatedly over the past several months that Canadian consumer debt is rising too rapidly and threatens the future health of the economy.

Flaherty dismissed the CAAMP report Wednesday, noting that the group has a vested interest in seeing the housing and mortgage markets remain robust.

“My concern has been to strike the right balance between the availability of credit in the residential housing sector and the danger of developing any sort of bubble in the housing sector,” he told reporters, adding that he doesn’t believe further tightening will be necessary at this time.

John Andrew, a professor at Queen’s University School of Urban and Regional Planning, said it’s unlikely mortgage reforms would put a significant chill on the housing market because the changes are aimed at the highest-risk borrowers, who are already unlikely to qualify for insured borrowing from most lenders.

“I dispute their claim that the housing market is slowing down,” he said.

“I don’t see (mortgage changes) really affecting the market that much because there really aren’t that many lenders that are going to be lending … to that type of a borrower anyway.”

But CAAMP said changes made by Flaherty last April had already disqualified a significant number of potential borrowers, thereby curbing debt growth.

Last April, the government introduced changes that forced borrowers to meet the standards for a five-year fixed-rate mortgage even when applying for a lower interest, shorter-term loan.

That slimmed average gross debt service ratios, a measure used by banks to test how much housing debt will eat into income, by about one per cent to 19.3 per cent in the second half of the year, the CAAMP report said.

The study also tested the impact of higher mortgage interest rates, assuming a rate of five per cent by the end of 2012. That would raise the cost of a fixed-rate mortgage by about one percentage point but would have a bigger impact for those with variable rates, about 2.5 per cent.

It found that expected increases in income levels should more than offset increases in interest rate payments and most borrowers would be able to absorb the shock.

“Recent mortgage lending, in an environment of very low interest rates, results in some risk of financial difficulties if and when interest rates increase in future,” Dunning wrote in the report.

“However, the degree of risk does appear to be extremely small.”

Still, the CAAMP report found the amount of outstanding mortgage debt in Canada surpassed $1 trillion in August and stood at $1.08 trillion in October — about 57 per cent higher than five years earlier.

That represented a debt growth rate of 9.4 per cent per year. The figure is slightly lower than the average over the past decade, but troubling because it far surpassed income growth.

Mortgage defaults also remain higher — at about 0.43 per cent — than they were before the recession, when the rate stood at less than 0.30 per cent, the report found.

However, CAAMP said that as the housing market slows, debt growth is already decelerating and as of October stood closer to seven per cent, below the 10 per cent average for the decade.

The report was based on 59,000 insured mortgages for home purchases and 26,500 for refinancing that were funded in 2010. The vast majority of those included in the data — 97 per cent —were considered high risk, meaning the loan-to-value ratio exceeded 80 per cent.