Financial Update For Feb. 11, 2010

• TSX +12.09
• DOW -20.26
• Dollar +0.43c to 94.07cUS Canada's currency bounced higher against the U.S. dollar as investors took on more risk-sensitive securities with the hope that Greece will see some form of help for its debt problems
• Oil +$.77 to $74.52US per barrel.
• Gold -$.80 to $1,075.30 USD per ounce
Ottawa advised to tighten mortgage rules


February 10, 2010
By Julian Beltrame
OTTAWA — The federal government should avoid major surgery and make only minor adjustments to deal with fears of overheating in Canada’s housing market, a number of leading economists said Wednesday.
Federal Finance Minister Jim Flaherty and the Bank of Canada have expressed concern that Canadians may be assuming too much debt in home purchases, debt that could rebound on them when interest rates rise.
But some solutions being floated in advance of Flaherty’s March 4 budget — doubling the minimum down payment to 10 per cent, or reducing the maximum amortization period from 35 to 30 years — could do more harm than good, the economists said.
“We want some sort of micro-surgery, not (taking) a pickaxe to the problem,” said Avery Shenfeld, chief economist with CIBC World Markets.
Bank of Nova Scotia economist Derek Holt said such radical surgery could cause home prices to crash and shake confidence in the consumer sector, a key driver of the fragile economic recovery.
Interviews with economists at four of Canada’s big banks showed some disparity of views as to the size of the problem, but general agreement that there is good reason for concern.
Most see home prices in Canada as being 10 to 15 per cent too high, largely because construction of new homes ground to a halt during the recession, decreasing available supply, and because of record-low interest rates, which are luring many new entrants into the market.
The Canadian Real Estate Association said this week it expects home prices to gain another five per cent to a record average of $337,500 this year. Sales will also hit record levels this year before tailing off next year, the association said.
It is unclear whether Flaherty is contemplating measures to cool prices and activity. Last weekend, the minister told reporters he was closely watching prices, but did not believe Canada had a housing bubble as yet.
But if one were to develop it could have wider repercussions on the economic recovery, as occurred in the United States, the economists said.
The best approach now is to take baby steps that would help moderate prices and activity and create a so-called soft landing.
One measure, according to TD Bank deputy chief economist Craig Alexander, would be to tighten the “income test” banks use to assess whether a prospective homeowner can meet monthly mortgage payments.
Already, banks build in a cushion in handing out floating mortgages by judging credit worthiness based on the borrower’s ability to make payments on the three-year rate, not the variable rate — about a two percentage point difference. Alexander said that could be increased to the still higher five-year posted rate.
A variation would be for banks to judge ability to meet payments not just on the mortgage but on all outstanding debts of a prospective homebuyer.
Yet another idea would be to deny government-backed insurance on mortgages for investment properties, thereby dampening speculation.
Economists believe such measures could help deflate any housing bubble without bursting it.
“It’s not in the interest of either buyers or lenders to have boom-bust cycles,” said the TD’s Alexander.
“That’s the lesson from the U.S. experience. If you have the wrong incentives and you don’t have regulations, you end up in a place you don’t want to be.”
Bank of Montreal economist Douglas Porter said if Ottawa chooses to raise the down payment requirement, it should do so modestly, perhaps to six or seven per cent.
Porter said, however, that he didn’t think reducing the amortization period to 30 years would be dramatic enough to cause a major disruption in the market.
Economists point out that home affordability is expected to tighten this summer even if Flaherty does not change the rules.
The introduction of the harmonized sales tax starting July 1 in Ontario and British Columbia — two of the hottest home markets — is expected to add a couple of thousand dollars to home purchases in those provinces.
And Bank of Canada governor Mark Carney is widely expected to start raising interest rates as early as July

Financial Update For Feb. 10, 2010

• TSX +158.94
• DOW +150.25 back up over 10,000 pts to 10,058
• Dollar +0.57c to 93.64cUS as risk appetite was whetted by reports of European rescue efforts for debt-strapped Greece. Also supporting Canada's commodity-linked dollar were firmer oil prices, and a 1% gain in gold prices.
• Oil +$1.86 to $73.75US per barrel.
• Gold +10.90 to $1,076.70 USD per ounce

Info below published in the US weekly MBA newsletter
Economy & Business: Delinquencies
Washington Post (02/09/10) P. A11
While the rest of the private loan market seems to be stabilizing, Fitch Ratings reports that delinquencies on prime "jumbo" mortgages nearly tripled last year and continued to climb in 2010. January -- when 9.6 percent of big loans not backed by government agencies were 60 days or more late -- marked the 32nd consecutive month of growth in "serious delinquencies," according to the ratings firm.

Real estate association’s rules challenged by federal competition watchdog
The Canadian Press
OTTAWA — The Competition Bureau says it’s challenging rules imposed by the Canadian Real Estate Association, a body that represents more than 98,000 real estate brokers, agents and salespeople.
The federal agency says the association’s rules limit choices for consumers and force them to pay for services they don’t want, also stifling innovation in the market for residential real estate services.
The Competition Bureau is challenging association rules imposed on agents who list properties on the association’s Multiple Listing Service, also known as MLS.
The agency says most real estate transactions in Canada make use of the MLS system, which includes information available only to association members.
But under association rules, according to the Competition Bureau, agents are forbidden from offering consumers the option of simply paying a fee to list a home on MLS.