The Bank of Canada kept its benchmark lending rate at 0.25 per cent Tuesday, reiterating its conditional commitment to hold rates steady until the middle of 2010.

“While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly,” the bank said in announcing the rate decision.

Although recent data on GDP and inflation have diverged somewhat from projections, “the main drivers and the profile of the projected recovery in Canada remain consistent with the bank’s views,” the bank said.

The Canadian economy grew by a tepid 0.1 per cent in the third quarter, Statistics Canada reported earlier this month.

Canada’s central bank expects economic growth to become more solidly entrenched throughout 2010 and inflation to return to the two per cent target in the second half of 2011.

RBC economist Dawn Desjardins expects the central bank will raise rates by a full percentage point in the latter half of 2010, once it is more confident that the recovery is underway.

Loonie’s threat downplayed

The central bank softened its view on the impact of the strengthening currency, indicating “persistent strength in the Canadian dollar … could act as a significant further drag on growth and put additional downward pressure on inflation,” Desjardins noted in reaction to the decision.

The central bank is set to unveil its next decision on lending rates on Jan. 19, 2010.

The U.S. sub-prime housing bubble burst in mid-2006, and the mortgage crisis has spread beyond the sub-prime market to the prime mortgage market.

The U.S. housing crisis has led to plunging property prices, a global credit crunch, a slowdown in the US economy, and tightened lending conditions by banks as they react to soaring mortgage defaults, in both the prime and sub-prime markets, causing billions of write-downs.

The Canadian market is far healthier throughout the same period, and will remain so in the foreseeable future. Canada has not experienced the sharp increase in arrears and defaults nor the sharp decrease in property values that has occurred in the U.S.

Problems in the U.S. are unique to that mortgage market:

The U.S. housing bubble reached its peak in 2005, and started deflating by mid-2006, and has since accelerated:

Average national resale house prices grew 8.96% per annum from 2002 to 2005 but declined by 3.03% per annum from 2005 to 2008. Prices at end of 2008 were 8.61% lower over than end of 2007.

In the U.S. Mid-West and West regions, average prices fell 13.4% and 27.3% year-over-year at end of 2008 from 2007. In cities like Las Vegas and Miami, average prices at end of 2008 plunged 33.0% and 28.8% respectively year-over-year.

Housing starts for 2002 of 1.7 million grew to 2.1 million for 2005, an annual growth of 6.65%. Housing starts have since declined 56.19% per annum, dropping sharply to only 0.9 million for 2008.

Mortgage defaults and foreclosures soared to record high levels. Delinquencies in both the prime mortgage market and subprime market rose sharply.

The main culprits behind the U.S. sub-prime market meltdown have been well-documented by the press:

• Aggressive lending practices, irresponsible borrowing, creative Wall Street financial engineering, riskier product design, less onerous underwriting, etc.

Mortgage interest deductibility
• Holding consumer credit and debt and having equity in your home is not tax efficient.

Borrower friendly laws
• Lenders must choose to either pursue covenant or foreclose (in the vast majority of state jurisdictions).

Dominance of commission based broker channel
• During the growth years, brokers account for in excess of 50% of new mortgage originations in the prime market and 70% in the sub-prime market.

A cultural attraction to leverage
• The ability to easily re-establish credit after bankruptcy removes much of the stigma.

Canadian mortgage market is different from the

Canadian Outlook:

• Latest outlook by CMHC: “the economic downturn will result in a decrease in demand for home ownership leading to a decline in housing starts and existing home sales in 2009”.

• This is echoed in CREA’s forecast: “home sales activity is expected to decline in 2009 before rebounding in 2010”, “average home price is forecast to decline in 2009 and stabilize in 2010”.

Why is the Canadian market different?

Lack of mortgage interest deductibility. No interest deductibility for tax – therefore no tax incentive to own.

Lender friendly laws. Personal covenants in 8 of 10 provinces.

Origination landscape has been dominated by banks. About only one-third of new originations from broker channel, remainder through bank branch and other sales networks.

Subprime market was at a much earlier stage of development. The sub-prime market in Canada is estimated to be only about 5% of the total mortgage industry versus historically 20% in the U.S.

The result?

Less aggressive products and policies. No option ARMs with teaser rates, no interest-only products, no negative amortization.

Defaults for both prime and sub-prime much lower
• U.S. Prime vs. Canada Prime: 4.70% vs. 0.37% (Q1 2009)
• U.S. Sub-prime vs. Xceed uninsured: 24.88% vs. 3.37% (Q1 2009)

Download and read the full Xceed June 2009 US and Canada Mortgage Market Comparison

Housing Starts Up for 2010

Housing starts: After a slow start in 2009, housing starts will become stronger by the end of 2009 and average 141,900 units. In 2010, starts will increase to approximately 164,900 units.

Resales: Sales of existing homes through the Multiple Listing Service® (MLS®) have become more robust since the start of 2009. The strong pace of resales reflects, in part, activity that was delayed in the previous two quarters of 2009 and is likely not to be sustained. MLS® resales will be about 441,300 units for 2009, up from 433,990 units in 2008. As far as 2010 is concerned, there will be approximately 445,150 units sold.

Resale prices: After a few years of strong gains, the average MLS® price moderated in 2008 to $303,607. Recently, however, average prices have recovered. The average MLS® price is expected to increase to $312,950 in 2009 and to $324,500 in 2010.

Provincial Spotlight

Ontario: New home construction in Ontario will move lower to 47,400 units in 2009 while 2010 will see a
strong improvement to 56,500 units. Multiple-family starts will decrease in 2009 to 26,500 units before reaching 32,900 units in 2010.

Saskatchewan: Housing starts in Saskatchewan will moderate in 2009 to 3,600 units. However, a relatively strong labour market will continue to attract migrants to the province. Therefore, as the economy strengthens in 2010, housing starts will rebound to 4,350 units.

Going green in Ontario for home owners, farmers and small businesses looks like it may put, well more green in your pocket.  In the range of $0.80 per Kwh.

If you are a homeowner, farmer or small business owner, you have the opportunity to develop a very small or “micro” renewable electricity generation project (10 kilowatts or less in size) on your property. Under the microFIT Program, you will be paid a guaranteed price for all the electricity your project produces for at least 20 years.

Consider the benefits of generating green energy from renewable sources such as the sun, wind, water or bioenergy, and selling it for a guaranteed price. You can be part of Ontario’s growing green energy movement, make money and contribute to a cleaner environment.  

Here is a PDF with an overview of the Ontario Power Authoritys microFIT program.

http://microfit.powerauthority.on.ca/