Apr 2010 6

First Rate Hikes Appeared

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 by Glen Scott Photo by Glen Scott

Recently, Royal Bank of Canada and Toronto-Dominion Bank announced they were raising interest rates on some fixed-rate mortgages. They didn?t wait for Bank of Canada to do the first step and raised five-year fixed-rate mortgage up 60 basis points. This doesn?t seem as big of threat, nevertheless this may be one of the first moves towards more painful increases.

Canada?s housing market is facing a challenge. To keep the course it has right now, it needs mortgage rates to remain low and affordable. But to keep setting new sales records it also needs more people to land more jobs so they can afford to buy more homes. This produces an almost impossible scenario. Interest rates usually stay low only if growth gap and consequently unemployment remain high. Hoping for low interest rates and low unemployment rates is like a farmer praying for both dazzling sun and buckets of rain.

On a more positive note, Canadian property market is likely to avoid a new serious drop for several reasons. Unemployed borrowers in most of Canada can?t simply walk away from their debts as many U.S. homeowners are did and still keep doing. Most high-risk mortgages are insured against default through Canada Mortgage and Housing Corp., a government-owned corporation. And the strong recovery looks as if it will create jobs that will help people make their mortgage payments.

Canada?s housing market has been doing pretty good for the last few months, but it will have to overcome few challenges that lay ahead. None of them will be easy to get over, but stricter rules and policies in the current housing market are prepared to face the challenge.

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