For example, a $200,000 mortgage with a term of 25 years and an interest rate of 2.25 per cent has monthly payments of $876.26. For the same mortgage with an interest rate of five per cent, the monthly payments become $1,169.18.

And this doesn't only apply to variable-rate mortgages, but to fixed-rate mortgages that are coming up for renewal, Tal said.

"It's not just variable rates, because five years from now the rates will be much higher, so you don't want to find yourself in a situation five years from now where you can't afford the house," he said.

"It's important to be extremely prudent and not to be totally blinded by those rates."

Both John Turner, director of mortgages at BMO, and ING's Beaudry said they've seen an increase in the number of people opting for fixed-rate mortgages to ensure some certainty when interest rates begin to rise again.

"In the first six months (of 2009), we saw well over 60 per cent of our applications being for variable-rate mortgages, and in particular in our case five-year variable-rate mortgages," Beaudry said.

"Towards the latter part of the summer, until now, the trend has reversed to where we're seeing about 70 to 80 per cent of our applications going for five-year fixed-rate mortgages."

Turner agreed, saying 60 to 70 per cent of BMO's customers were opting for variable-rate mortgages in the past, but lately "there's been a slight shift to fixed."

The key is finding a monthly payment you feel comfortable with and then thinking ahead - if you have a variable-rate mortgage, or a fixed-rate mortgage that's coming up for renewal soon, will you be able to afford to continue to make your payments if interest rates go up?

Turner said now is the time to begin making more frequent payments, while interest rates are still low, if you can afford it. This will reduce your principal more quickly and will mean lower payments down the road when interest rates are higher.

"For example, if you have a $200,000 mortgage and you opt to pay biweekly (instead of monthly), you knock four years off your mortgage and save about $47,000 in interest just by doing that," he said.

As well, if you have a variable-rate mortgage, it's important to keep an eye on interest rates and lock in if you feel they're getting too high, said Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, or CAAMP.

The association also recommends that homeowners renew their mortgages before the scheduled renewal dates given the current low level of interest rates.

However, Murphy predicted that when interest rates do start to go up it will be a gradual climb, and Canadians shouldn't worry about a sudden jump in the number of people who are forced to default on their mortgages.

"I think people are predicting that rates will start to increase in 2010 at some point in time, but it'll be more of a slow, measured increase as it goes up, and most Canadians who have variable products will have the ability to lock in," Murphy said.

CAAMP says the volumes of residential mortgage credit outstanding is forecast to grow by seven per cent between 2009 and 2011, and is predicted to pass $1 trillion in 2010. The average mortgage interest rate was 4.55 per cent as of October, down from 5.41 per cent a year ago.

Canadian home-resale prices are likely rise in 2010 at an even faster pace than this year but a dangerous bubble probably won't develop, TD Economics said in study published on Tuesday.

The average price of an existing home in Canada is expected to surge 9-10 percent next year to about C$346,000 as sales climb to 475,000. In 2009, the average price rose an estimated 4-5 percent on an annual basis.

But the sales momentum, which TD expects will last six to 10 more months, should not translate into a "bubble" as the cost of ownership, when lower interest rates are taken into consideration, has fallen in recent months.

The residential housing market froze late last year in the wake of the global financial crisis, but its swift recovery has prompted some concern about the chances of a sudden collapse. Sales of existing homes rose to a record monthly high in October.

TD described the Canadian market's downturn and subsequent recovery "as V-shaped as can be." It partly attributed the rebound to pent-up demand after last year's slump.

Over the next few years, sales growth should moderate as more supply comes into the market and interest rates rise, TD said in its resale housing outlook report.

In 2011, eroding affordability is likely to weaken sales by more than 10 percent to 421,200 units while prices rise 1.6 percent to C$351,600. In the following two years, prices and sales are expected to rise modestly.

The Canadian housing market has seen a stronger and faster rebound from the recession than any other segment of the economy, due in large part to enticingly low mortgage rates.

But rates this low - 5.59 per cent for a five-year fixed-rate mortgage and 2.25 per cent for a five-year variable-rate mortgage at one bank - can't last forever, and experts are advising borrowers to prepare for higher rates within the next 12 months.

"We have to realize those are emergency interest rates," said CIBC economist Benjamin Tal.

"Interest rates will rise - it's just a question of time, it's not a question of if. And if that's the case, we have to make sure that when we borrow this money we can afford the same mortgage 200 or 300 basis points higher. That's the key responsibility now of borrowers and lenders, to make sure that what we do, we do it in a prudent way."

Depending on whether they are fixed or floating-rate, mortgages are tied to either the bond market or the Bank of Canada's key lending rate, which are closely related. The central bank's rate has been sitting at a record low of 0.25 per cent since the spring and it has said it will keep it steady until at least next June to help stimulate the ailing economy.

On Wednesday, three of Canada's biggest banks - Royal Bank (TSX:RY), Bank of Montreal (TSX:BMO) and TD Bank (TSX:TD) - announced that they will cut posted rates for fixed-rate mortgages by up to 0.25 percentage points. On Thursday, CIBC (TSX:CM), Laurentian Bank (TSX:LB) and Scotiabank (TSX:BNS) followed suit by cutting their five-year mortgages by 0.25 per cent to 5.59 per cent, in the case of CIBC and Scotiabank, and 5.6 per cent at Laurentian.

But mortgage lenders agree that rates are nearing the bottom and will begin to rise again in 2010.

"The only sort of assurance that you hear in the marketplace is the Bank of Canada's going to try to maintain that rate until June. But past that, there are already warnings that if there need to be adjustments, the adjustments could be a little more abrupt than we've been used to in the past," said Martin Beaudry, vice-president of retail lending at ING Direct.

CIBC's Tal said that with rates this low, "it's almost a crime not to take a mortgage out," but warned that consumers need to be prepared for higher interest rates later on and what this could mean for their personal finances.

For example, a $200,000 mortgage with a term of 25 years and an interest rate of 2.25 per cent has monthly payments of $876.26. For the same mortgage with an interest rate of five per cent, the monthly payments become $1,169.18.

And this doesn't only apply to variable-rate mortgages, but to fixed-rate mortgages that are coming up for renewal, Tal said.

"It's not just variable rates, because five years from now the rates will be much higher, so you don't want to find yourself in a situation five years from now where you can't afford the house," he said.

"It's important to be extremely prudent and not to be totally blinded by those rates."

The dramatic recovery of the resale housing market – with the pace of activity and prices setting another record in October – has some economists wondering if Canada is in the midst of a housing bubble.

Economists at Scotia Capital Inc. are of the view that housing “is becoming an over-valued asset class.”

Economist Michael Gregory of BMO Nesbitt Burns, on the other hand, says Canada is in the midst of a “booming rebound” – but not a bubble.

And Stewart Hall, an economist at HSBC Securities (Canada), says it is too soon to characterize the housing market activity as a bubble yet, but the situation bears watching.

Bubbles are formed when excessive speculation enters a market, pushing prices higher than justified by market fundamentals. However, asset bubbles inevitably pop, leading to sharp price declines.

'This is becoming an over-valued asset class'

“Is Canada in a housing bubble? Probably, but low rates, mortgage innovation and a relative shortage of new supply are likely too keep it going for a while yet,” Scotia Capital economists Derek Holt and Karen Cordes said in a research note Monday.

“… Now that last fall's pent-up demand has been released, the three forces of low interest rates, transferring future sales to the present via mortgage innovation, and modest new supply can keep Canadian housing markets humming for some time yet before the eventuality of a softer market on rising rates in a future relative demand vacuum set in.”

After CREA released the October numbers, Mr. Holt and Ms. Cordes expanded on their view.

“The Canadian Real Estate Association has reported October sales and prices. The results are a bright spot in the Canadian economy, but with prices up 20 per cent over year-ago levels and at all-time highs by virtually every measure, this is becoming an over-valued asset class in our opinion,” the Scotia Capital team said.

“Flagging rich valuations is not, however, tantamount to predicting anything imminent by way of give-back on prices,” the added.

“In fact, they could well push further into record territory next year before risks build.”

Examples of non-qualifying work

• Landscaping, other than to restore the lot to its condition prior to the recognized work
• Construction of outdoor play equipment o
  
• Interior decoration (decorator's service)
  
• Erecting or repairing a fence, low wall, etc.
  
• Drilling a well, installation of a septic tank and septic field
  
• Installation of household appliances
  
• Installation of a swimming pool, sauna, hot tub, etc.
  
• Refurbishment of access points (footpaths, driveway, etc.), unless made necessary as a result of the recognized work
  
• Work aimed exclusively at repairs (repairing a leak, a door, etc.) or maintenance (application of paint to walls solely to spruce up the appearance)

Qualified contractor

The contractor must, at the time the agreement is entered into between the owner and the contractor, be a person or partnership with an establishment in Québec. Must not be the owner or co-owner of the eligible residential unit, or the spouse of one of the owners of the eligible residential unit at the time the home improvement or renovation work is carried out hold an appropriate licence issued by the Régie du bâtiment du Québec. Note that an individual who carries out the improvements or renovations on his or her own principal place of residence may
not claim this tax credit.
Claiming the credit

You may claim the refundable tax credit for home improvement and renovation on your 2009 income tax return if you are resident in Québec on December 31, 2009. You must send with your return a form indicating all of the information related to the work carried out, such as:

• a description of the work
• the cost of the work
• the registration number assigned under the Act respecting the Québec sales tax (QST) to the person who carried out the work
• the licence number issued by the Régie du bâtiment du Québec to the contractor carrying out the work (if applicable)

It is not necessary to provide your receipts or supporting documents when you file your income tax return. However, you must keep these documents for six years following the year to which they apply as Revenu Québec could audit you regarding this credit.

Documents

IN-179-V

Tax Credit for Home Improvement and Renovation

Important Note

These texts on the said programs from Canada or Quebec are provided for information purpose only; you must consult the official Canada http://www.cra-arc.gc.ca/tx/ndvdls/sgmnts/hmwnr/hrtc/lgblty-prd-eng.html and Quebec http://www.revenu.gouv.qc.ca/eng/particulier/impots/impot/credit_remb/renovation/index.asp Internet sites and documentation to make sure you qualify. We decline all responsibility in regard to any error or omissions, the readers are responsible to check this information directly with the proper government agencies.

If you meet certain eligibility requirements, you may be entitled to a refundable tax credit for the 2009 taxation year for expenses incurred under a residential renovation agreement entered into in 2009 for home improvements or renovations.


The tax credit is equal to 20% of the eligible expenses in excess of $7,500. The maximum amount of eligible expenses is $20,000 for a maximum credit of $2,500.

Calculator

To obtain an estimate of the tax credit for home improvement and renovation that you could be entitled to for the 2009 taxation year, use the calculator available on the website of the Ministère des finances.

Eligibility requirements

To be eligible for the refundable tax credit for home improvement and renovation, you must:

• Own an eligible residential unit located in Québec
• Have the qualifying work for improvement or renovation carried out at your principal place of residence
• A qualified contractor must be hired to carry out the work under the terms of an agreement entered into after December 31, 2008 and before January 1, 2010.
• The expenses incurred to carry out the work must be paid no later than June 30, 2010.

Eligible residential units

An eligible residential unit is a residence built before 2009. The individual who incurs the home improvement or renovation expenses must be the owner (or co-owner) at the time the expenses are incurred. The residential unit must not only be the owner's principal place of residence, but also:

• an individual house
• a manufactured home or a mobile home permanently installed
• a unit in a building held in divided co-ownership
• an apartment in a building held in undivided co-ownership or held by a sole owner

Qualifying work

Qualifying work that gives entitlement to the refundable tax credit for home improvement and renovation consists of:

• the renovation, modification, improvement, conversion or expansion of an individual's eligible residential unit, including the addition of structures adjoining or incidental to the unit
• the work needed to restore a lot to its condition before the work described above was carried out

Examples of qualifying work

Division of rooms (knocking down walls or addition of partitions)
Finishing of a basement, attic or garage
Installation of a fireplace, a heat pump or an air conditioning system
Installation of an alarm system or home automation system
Insulation (including for a garage)
Replacement of the plumbing, electrical system, heating system, air exchange system
Replacement of the roofing, rainwater gutters and chimney
Replacement of doors and windows
Replacement of sewage treatment systems (septic tanks and septic field)
Renovation of a kitchen, bathroom, washroom
Expansion of a house built before 2009
Construction work on structures adjoining or incidental to a house built before 2009

Work performed by electricians, plumbers, carpenters, architects

Generally, work performed by electricians, plumbers, carpenters, architects, etc.
in respect of an eligible expense qualifies.

Family member hired for renovations

Expenses are not eligible if the goods or services are provided by a person related to you, unless that person is registered for the Goods and Services Tax/Harmonized Sales Tax under the Excise Tax Act. If your family member is registered for GST/HST and if all other conditions are met, the expenses are eligible for the HRTC.

Eligible dwellings

An eligible dwelling is a housing unit that is eligible to be your principal residence or that of one or more of your family members at any time between January 27, 2009, and February 1, 2010.

In general, a housing unit is considered to be your principal residence when it is owned by you and ordinarily inhabited by you, your spouse or common-law partner, and your children. This means that any dwelling that you own and use personally could qualify, including your home or your cottage.

Cottages

If you own and use your home and cottage personally, eligible expenses incurred for both properties will normally qualify for the HRTC. Note that the maximum amount of eligible expenses you can claim for the HRTC is $10,000 per family.

Rental and/or business use of an eligible dwelling

If you earn business or rental income from part of an eligible dwelling, you can claim the HRTC only for expenses incurred for the personal-use areas of the dwelling.

Condominiums and co-operative housing corporations

For condominiums and co-operative housing corporations, your share of the cost of eligible expenses for common areas qualifies.

Eligibility period

The HRTC is based on eligible expenses for work performed or goods acquired after January 27, 2009, and before February 1, 2010, under an agreement entered into after January 27, 2009, related to an eligible dwelling.

Some businesses or individuals may assert that certain items qualify for the HRTC. It is important to remember that you are responsible for ensuring that all eligibility requirements are met when you claim this credit on your tax return.

Examples of eligible expenses

• Renovating a kitchen, bathroom, or basement, windows and doors
• New carpet or hardwood floors
• New furnace, boiler, woodstove, fireplace, water softener, water heater, or oil tank
• Permanent Home ventilation systems, central air conditioner
• Septic systems and wells
• Electrical wiring in the home, home Security System (monthly fees do not qualify)
• Solar panels and solar panel trackers
• Painting the interior or exterior of a house
• Building an addition, garage, deck, garden/storage shed, or fence
• Re-shingling a roof
• A new driveway or resurfacing a driveway
• Exterior shutters and awnings

• Permanent swimming pools, hot tub and installation costs (in ground and above ground)
• Landscaping
• Associated costs such as installation, permits, professional services,equipment rentals, and incidental expenses
• Fixtures - blinds, shades, shutters, lights, ceiling fans, etc.

Note

Window coverings, such as blinds, shutters and shades, that are directly attached to the window frame and whose removal would alter the nature of the dwelling are generally considered to be fixtures and therefore would qualify for the HRTC.

In some circumstances, draperies and curtains may qualify for the HRTC, if they would not keep their value or usefulness if installed in another dwelling. If these qualifying criteria are not met, it is likely that draperies and curtains would not qualify for the HRTC.

Examples of ineligible expenses

• Furniture, appliances, and audio and visual electronics
• Purchasing of tools
• Carpet cleaning
• House cleaning
• Maintenance contracts (e.g., furnace cleaning, snow removal, lawn care, and pool cleaning)
• Financing costs

Federal Home Renovation Tax Credit (HRTC)

Excessive real estate strength in Canada from ultralow mortgage rates could push the Bank of Canada to raise interest rates sooner or more aggressively than forecast, according to a TD Economics report on Tuesday.

The possibility is worth watching closely, the economics arm of Toronto-Dominion Bank argued, although it also said the most likely scenario is that the real estate market will moderate and inflation will remain in check.

The Bank of Canada has pledged to keep its interest rates unchanged at 0.25 percent until mid-2010, unless it sees a threat of inflation spinning out of control.

TD pointed to recent statements by the central bank that hinted that it would seek to lean against signs of emerging asset bubbles and that it is also monitoring developments in home prices.

In a recent speech, Bank of Canada Governor Mark Carney deemed the strength in existing home sales as "temporary", reflecting "pent-up demand" and improved affordability.

"The (Bank of Canada's) view at the moment is that the recent resurgence in real estate is temporary, but if it does not moderate in the coming year -- or worse still if price growth accelerates -- it could lead to an earlier and more substantial tightening in policy than currently anticipated," TD economists Craig Alexander and Grant Bishop said in the report on Tuesday.

The economists stressed that the central bank targets the rate of consumer price growth and does not target asset values.

"The key issue is whether the low interest rate environment is creating an economic imbalance that requires a rebalancing of monetary policy," the TD economists said.

Canadian real estate markets have staged a stunning turnaround this year from the end of 2008 when sales and prices retreated sharply. The latest Canadian Real Estate Association data showed August home sales were up 18.5 percent from a year ago, while prices rose 11.3 percent nationally from a year earlier to an average C$324,779 ($306,395).

TD expects sales will cool in the coming months and for price growth to return to a mid-single digit pace after months of pent-up demand and tighter mortgage pricing.

"The base-case economic forecast does not anticipate that hot real estate markets will force the Bank of Canada's hand, but it is a risk worth closely monitoring," the TD economists said.

TD expects the Bank of Canada will begin to gradually lift the benchmark overnight interest rate in the fourth quarter of 2010.

Did you know that there is more than one way to compute the interest on a loan?

Normally, interest rates on all fixed-term mortgage loans are computed semi-
annually. However, for mortgage loans with a variable rate, some lenders use a
semi-annually capitalized variable rate, while others use a monthly compounded
variable rate.

This difference in the calculation changes the payment by only a
few dollars per month but, over a long period of time, it can significantly affect the
overall cost of your loan.

For example: for a $250,000 mortgage amortized over 25 years, the customer
will pay $3.40 more per month if the lender capitalizes monthly, an increase of
$1,020.

Do some digging; might as well keep this money in your pocket. Your
advisor knows where to go and who to deal with in order to save you money.

Canadian banks are chopping their mortgage rates across the board by up to a third of a percentage point as the cost of borrowing in the bond market falls.

The popular five-year closed mortgage gets the biggest cut.

At TD Canada Trust, a five-year closed mortgage drops three-tenths of a percentage point to 5.55 per cent. At the Royal, the five-year closed term falls three-tenths of a point to 5.49 per cent. At BMO, a five-year loan also falls to 5.49 per cent, but that represents a drop of .36 of a percentage point.

These are all posted rates. The big banks typically offer discounts of at least a full percentage point on most closed mortgages.

BMO and RBC say they're offering a special rate of 4.19 per cent on their five-year mortgages. A few smaller financial institutions such as First Calgary Savings are currently offering five-year loans for just under four per cent.

At the big banks, most other mortgage terms were trimmed by smaller amounts. A one-year closed mortgage falls a fifth of a percentage point to 3.70 per cent at BMO and RBC. A 10-year closed mortgage drops a fifth of a percentage point to 6.70 per cent at TD and to 6.75 per cent at the other two.

Analysts say low mortgage rates have helped to turn around the Canadian housing market in recent months. Real estate statistics for July show that the number of resales across the country surged more than 18 per cent from a year earlier to a record high. The average MLS sale price in July was up 7.6 per cent from July 2008.

The Bank of Canada is widely expected to keep its key overnight lending rate unchanged at its current record low of 0.25 per cent when it makes its next interest rate policy announcement on Thursday.

Real estate prices rose again in August and were approaching their levels of a year ago, numbers released Wednesday by the Greater Vancouver and Fraser Valley real estate boards showed.

Market watchers, surprised by the strength of the rebound, said it appeared buyers were cashing in on record-low mortgage rates while they last.

Sales set records in July and stayed hot in August. The question now is whether the market can keep up the pace.

“Before I would call this a complete recovery I would want to see a couple of months of data,” Robyn Adamache, a market analyst with Canada Mortgage and Housing Corp. said in an interview.

Adamache added that there now are five months worth of data showing an upward trend, but “it remains to be seen whether this was just a one-shot deal where everybody was pre-approved for their [low-rate] mortgages and they basically jumped into the market, and whether or not [the market] can be sustained for the rest of the year.”

However, Adamache said on balance, Metro Vancouver’s average property prices, since their trough last March, have climbed back to within three percentage points of their peak.

She estimated that from peak to trough, average prices fell some 15 per cent.

Record-low mortgage rates, which fell as low as 3.65 per cent on five-year fixed-rate mortgages before rising again after June 1, played a big role in the market.

“If I had to put [market performance] on one thing, I would have to say interest rates,” Carolyn Heaney, Vancouver area manager of mortgage development for the Bank of Montreal, said in an interview.

Heaney said her mortgage lenders had a lot of clients who had been approved for mortgages with the low rates, and had 90 days to buy homes and close their purchases before their pre-approvals expired.

“There were certainly a lot of people who jumped off the fence in order to keep their rates,” she said.

Kevin Lutz, B.C. mortgage manager for RBC Financial Group, said that despite the recession, a bit of consumer confidence has been returning to the market. Lutz said the past few months have seen buyers cram almost a year’s worth of buying activity into a short period.

In the area of Metro Vancouver covered by the Real Estate Board of Greater Vancouver (REBGV), that translated into 3,441 sales through the Multiple Listing service, a 120-per-cent increase from last August, when the region saw 1,568 sales.

Prices in Metro continued to edge up with the benchmark price (the average price of the typical property sold) for detached homes hitting $732,656 in August. That was just 0.7 per cent below last year’s benchmark price for detached homes.

Some communities saw detached-home prices rise above their levels of a year ago. On Vancouver’s west side, for example, the benchmark of $1.4 million in August was three per cent higher than in the same month a year ago.

The $685,746 benchmark for detached homes on Vancouver’s east side was 3.2 per cent higher than a year ago.

New Westminster, Pitt Meadows and the Sunshine Coast also saw detached home prices higher than a year ago.

“It has been surprising,” REBGV president-elect Jake Moldown said. “I don’t think if you had talked to any of us in January that we would be expecting sales levels to be where they are today.”

However, he said with price adjustments and low interest rates combining to reduce mortgage payments, a lot of first-time buyers have jumped into the market, helping set off a chain reaction of upward movement.

In the Fraser Valley, realtors recorded their second busiest August on record, with agents racking up 1,786 sales through the MLS in August, up 96 per cent from 910 sales in the same month a year ago, when the market was sliding rapidly.

For the period of June through August, the board said valley realtors saw 5,857 MLS sales, which outpaced the same period of 2007, but is still far from matching 2005’s 6,866 sales for June, July and August.

Fraser Valley realtors saw the benchmark price (the average price of a typical property sold) for single-family homes creep up 3.8 per cent over the past three months to $483,839 in August, not quite erasing the losses of the past year. That price was still 3.5 per cent below last August’s $501,317 benchmark.

TD Bank Financial Group (TSX:TD) reported a decline in third-quarter profits Thursday and warned of trouble ahead as difficult economic conditions weakened the performance of some of the bank's U.S.-based operations.

"It's unlikely that this level of earnings can be maintained," admitted TD chief executive Ed Clark in a conference call Thursday.

"But we do have an excellent business that continues to perform well and produce solid returns on capital with very tight risk management."

TD's financial performance was "great" in the quarter, given the ongoing economic weakness around the world, said Clark.

"There probably aren't many people on this call frankly, including me, who thought we'd be having this kind of performance in the midst of a recession," he said.

"At the beginning of 2009, I would have found it hard to believe that by the third quarter I'd be talking about year-over-year increase on our earnings per share, even after issuing shares last year, but it certainly looks like we're going to be there."

The Toronto-based bank reported a profit of $912 million or $1.01 per share for the quarter ended July 31, down from year-earlier profits of $997 million or $1.21 per share.

The bank said adjusted earnings rose 17 per cent to $1.3 billion or $1.47 per share from $1.1 billion or $1.35 per share reported a year ago. The adjusted results beat the estimates of analysts surveyed by Thomson Reuters, who predicted earnings would come in at $1.23 per share.

TD said total quarterly revenue rose to $4.66 billion from $4.32 billion, while provision for credit losses declined to $557 million from $656 million.

TD's Tier 1 capital ratio, a key metric measuring the amount of money held in reserve, stood at 11.2 per cent at quarter's end.

Clark gave credit to governments and central banks around the world for responding "both quickly and appropriately" to the global economic crisis, but said there are concerns about the extent of the recovery.

"We have never been tested by conditions this tough, but we were up to it," he said.

"It seems like we're through the bottom, but there's clearly a debate going on about the strength of the subsequent economic recovery."

Results got a boost from TD's wholesale banking operations, where profits soared nearly 90 per cent to $327 million. Net income also improved five per cent in the Canadian personal and commercial segment, which recorded profit of $677 million.

Earnings in wealth management were dragged down by weak market conditions, while loan losses drove profits in U.S. personal and commercial banking down to $172 million.

Clark said TD didn't anticipate the resilience of the Canadian resale housing market.

"The structure of Canadian housing and mortgage markets provides an enduring strength for the economy and for our business," he said.

The bank also announced Thursday that Clark had advised of his intention to exercise up to 390,000 options for TD common shares, which represents 13 per cent of his outstanding options.

Clark intends to donate approximately 10 per cent of the pre-tax net proceeds to charity, and to sell the remaining acquired shares.

TD shares were up just over $2 in late Thursday trading at $62.62.

Canada's annual inflation rate slid to the lowest level in 56 years last month, dropping more than expected for the second straight month to set overall prices 0.9 per cent lower than last year, Statistics Canada reported Wednesday.

The fall on a month-to-month basis was even more dramatic, as prices in July fell 0.3 per cent from the previous month, reversing the similar monthly increase registered in June.

Still, economists say there is little concern that deflation - a broadbased and persistent decline in prices that could inflict further damage on the economy - is setting in in Canada, as it did in Japan during the 1990s.

That's because only three of the major components tracked by Statistics Canada are experiencing deflation and most of that is based on falling gasoline prices.

In July, consumers paid 4.1 per cent less at the pump than they did the previous month, and 28.3 per cent less than they did last July.

"Regular unleaded gasoline prices at self-service stations averaged 97.4 cents per litre in July 2009 compared with a record high of just under $1.37 in July 2008," the agency noted.

But analysts expect the impact of gas prices on inflation is due to reverse next month, which could cause the current deflationary trend to reverse course. The influence of gas prices has mirrored the downward spiral in oil prices, which peaked at US$147 a barrel last July before plunging over the following year.

"We don't have a deflation or an inflation problem in Canada," said Meny Grauman, an economist with CIBC World Markets.

Statistics Canada also pointed out that excluding the energy component, inflation remains a healthy 1.8 per cent in Canada. Core inflation is also close to where the Bank of Canada would like it, at 1.8 per cent, only slightly below the desired two-per-cent target.

Scotiabank economist Adrienne Warren predicted the July number will be the low point of the cycle and that annual inflation will return to positive territory in October.

Although most consumers would welcome widespread price decreases, economists say a prolonged deflationary cycle could have the effect of further undermining activity if consumers and businesses decide to hold off spending in hopes of realizing bigger savings in the future.

Still, Canadians were seeing many bargains when they went shopping last month.

Besides lower pump prices, the cost of purchasing a car was 4.3 per cent lower than last year, shelter prices fell two per cent, mortgage interest costs were 0.1 per cent lower, and clothing and footwear cost 2.1 per cent less than last July.

The key contributor to inflationary pressure continued to be food prices, which were five per cent higher in July on an annual basis.

But Warren noted the year-long strong buildup of food prices also appears to be slowing and will likely result in inflationary pressures being kept in check even after the impact of gas prices has worn off.

Food prices had risen 5.5 per cent in June, and 6.4 per cent in May.

"There is some evidence now that there's a market share price competition among the major grocery store chains, and consumers are a little more price conscious," she said.

As well, car insurance rose 5.1 per cent last month, tempering the overall descent in the gas-price dominated transportation component.

Regionally, eight provinces experienced negative inflation last month, with British Columbia heading the pack with a minus 1.6-per cent reading.

Saskatchewan was the only province with positive inflation, at 0.9 per cent, while prices were flat in Manitoba.

Canadian housing starts fell unexpectedly in July, dropping 4.1 percent from June and breaking a two-month run of gains, largely because of a drop in construction of multifamily dwellings.

Canada Mortgage and Housing Corp said on Tuesday that starts fell to a seasonally adjusted annualized rate of 132,100 units in July from a downwardly revised 137,800 units in June.

Analysts had forecast a rise to 145,000 starts. June starts were previously reported at 140,700 units.

The fall in July was attributed to a 9 percent decrease, to 61,000 units, in starts on urban multiple dwellings such as condos and apartment buildings. Single family homes dipped 1.1 percent to 52,500 units.

The figures paled against the buoyancy of recent data for existing home sales and building permits, but economists were encouraged that the July number was still above the average for the second quarter.

"In the second quarter, starts averaged a 127,900 annualized pace so July's data shows a modest improvement from that level," said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

"Canada's housing market is showing signs of emerging from its slump with the July level of housing starts putting the economy on track to record a quarterly increase for the first time since early 2008."

Rona Inc , Canada's biggest home-improvement chain, said on Tuesday that soft housing starts in the second quarter were partly to blame for its weak quarterly profit. It also said it remained cautious about recovery in the housing sector.

Starts increased 16.6 percent in Quebec in July, but fell in other regions. Urban starts dropped 17 percent in the Prairies, 15 percent in Ontario, 10 percent in British Columbia, and 1.4 percent in Atlantic Canada.

Rural starts were estimated at a seasonally adjusted annual rate of 18,600 units in July.

Wells Fargo & Co., the fourth- biggest U.S. bank by assets, will no longer offer residential mortgages and home-equity loans in Canada.

Wells Fargo’s Canadian unit stopped accepting applications for the loans yesterday at its branches and through its HomePlan broker network, Wells Fargo Financial Corp. Canada President Rick Valade said in an e-mailed statement. The company also informed brokers in a statement on its Web site.

“Wells Fargo continuously reviews its operations and makes appropriate changes to its business model,” spokeswoman Erin Downs said in a statement. “In response to recent analysis of our operations and the current market environment, at this time, we made the decision to stop originating consumer real-estate loans products in Canada.”

“We’ve seen a pattern of a number of namely U.S.-based lenders that have exited the field as things have become difficult in the market,” said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals. “It’ll mean less choice, less options for Canadians.”

Lenders that still offer so-called alternative mortgages to Canadians include Home Capital Group Inc. and Equitable Group Inc., as well as some Canadian banks, Murphy said.

Wells Fargo will honor existing mortgage commitments and will continue offering personal loans in Canada, the company said. The Canadian unit is a C$5.5 billion ($5.1 billion) business with 130 branches across the country, where it has operated for more than 60 years, according to the Web site.

Wells Fargo follows other mortgage providers including General Electric Co. that have stopped lending to Canadian homebuyers, including those who may not qualify for typical bank mortgages since the 2007 collapse of the U.S. subprime market.

Wells Fargo is the biggest U.S. mortgage originator, with more than 20 percent market share, according to Inside Mortgage Finance. Mortgage originations by San Francisco-based Wells Fargo surged to $129 billion in the second quarter, up 28 percent from the first quarter, according to company filings.

First time home buyers could be thrown a lifeline under plans being considered by the Treasury to underwrite 'risky' mortgages, allowing people with only small deposits to buy homes.

Since the credit crunch took hold, banks have demanded far tougher criteria for lending, asking buyers to provide between 25% and 30% of the price of a home as a deposit.

There were 30,000 loans to first time buyers in the first three months of 2009 against an average of more than 100,000 a quarter in the previous decade.

But the government is now studying a scheme used in Canada in the hope of encouraging banks and building societies to step up their lending. The Canadian programme requires all mortgages secured with a deposit of 20% or less to be insured by the government or private insurers, giving the banks more confidence to lend.

The Treasury has taken soundings from specialist insurance companies such as Genworth Financial, which suggest that the Canadian housing market has withstood the pressures of the global financial crisis better than most.

If the Treasury copied the scheme it might have to act as the insurer in the first instance before stepping back to underwrite insurance from private sector companies – opening the government to considerable criticism as it would put further taxpayer money at risk at a time when public finances are already stretched.

The amount of money flowing in the financial system still remains a concern for the government despite attempts to encourage lending through bank bailouts. Chancellor Alistair Darling is tomorrow scheduled to call in the major lenders to urge them to step up their lending to homeowners and small businesses to help stimulate the economy which has now contracted for five quarters in a row.

The possibility of the insurance scheme is outlined in the white paper on banking reform published this month and the Treasury promises an up-date in the autumn's prebudget report. "Some countries have adopted alternative models for mortgage insurance such as Canada where mortgage insurance is compulsory for all mortgages above a lower limit and below a maximum proportion of a home's value," the paper said.

"Some UK stakeholders have proposed that the government considers the benefits of international models like Canada. The government is interested in the lessons that may be learnt from the experiences of other countries and will update at the pre-budget report," the paper said.

The Treasury has made no decision on whether it would work here. The paper explains why it is being considered. "It is sometimes argued that this model helps provide borrowers with continued access to mortgage finance by encouraging risk sharing between insurers and lenders, and helping ensure that lenders do not take excessive risks when the economy is growing and do not withdraw from higher LTV lending during periods of economic disruption," the paper said.

But Treasury officials are also mindful of the pitfalls of the scheme which can push up the price of loans to first time buyers and others with small deposits. It might also be accused of trying to promote risky lending again or breath life into mortgage indemnity guarantees which lenders have charged customers for high loan to value loans but were largely scrapped in the mid 1990s.

The idea is being pushed by specialist insurers who might sell the necessary insurance to the banks. Genworth Financial, a US-based company, is among those to have submitted proposals. It is suggesting that the state would act as direct guarantor initially and that private sector players would step in to allow the government to "reduce its role from being a direct insurer to a guarantor of the private mortgage insurance providers".

"We urge the government to consider developing a partnership with mortgage insurance providers in order to prudently and efficiently provide a lasting and sustainable solution to prudently and efficiently provide a lasting and sustainable solution for the wholesale mortgage market," Genworth said.

The Bank of Canada offered a rosier, revised outlook on the economy Tuesday.

It now believes the economy is beginning to recover from recession and will perform better than expected in the next 18 months.

The central bank maintained its key overnight rate at the lowest possible level of 0.25 per cent, and committed to keep the rate there until the spring of 2010.

The revised outlook sees less shrinkage and more growth in the economy, according to Michael Kane of BNN.

"The bank of Canada now says the contraction will not be quite as bad as expected, and the expansion greater than expected," Kane told CTV News Channel.

"Previously it was expected that the Canadian economy would contract by 3 per cent this year, and then grow 2.5 per cent next year. They are moderating all those numbers now, and the latest expectation is for a smaller 2.3 per cent contraction this year, a slightly larger 3 per cent growth next year," Kane said.

Kane noted that measures taken by the bank and the federal government to help the economy from slipping too much -- such as stimulus funding and lower interest rates -- appear to be working.

The bank also said credit conditions have improved so much it is reducing the amount of money it is injecting into the system to support lending.

Despite signs long-term mortgage rates are creeping up, the housing market is continuing is bounce back to life according to the Canadian Real Estate Association.

In June 8.7% more homes were sold than in May.

It's the fifth straight month of increases -- a 17.9% increase over June 2008.

"This rebound reflects the releasing of a pent-up demand by buyers who moved to the sidelines towards the end of last year," said CREA chief economist Gregory Klump.

"Now there are signs the worst of the recession may be behind us, those people are emerging."

The bounce back was strongest in British Columbia where 39.8% more homes were sold in June this over the same month last year.

According to the CREA report,

Ontario was up 15.7%,

Quebec 9.8%,

Alberta 22.2%,

Saskat chewan 25.2%

Manitoba 0.2%.

This surge in home buying came despite a decision by Canada's five big banks last month to raise five-year fixed mortgage rates 40 basis points from 5.45% to 5.85%.

The decision was made despite the Bank of Canada's efforts to keep borrowing low by pledging to hold interest rates at the historic low of 0.25% until the middle of 2010.

Mary Webb, a senior economist with Scotiabank, says the low long-term interest rates in the spring were a reflection of a global economy with almost no signs of growth and that was bound to change.

"Now we're looking for a recovery, and not just in Canada but globally, and we're seeing it already in China and we expect growth to strengthen later this year and early next," Webb said.

With more people borrowing, banks are being forced to pay more to borrow the money they lend to home buyers and that drives up long-term interest rates, she said.

The worst of Canada's housing market woes appear to be past but the sector's rebound will be tenuous as a rise in mortgage rates and high unemployment limit the recovery in prices and sales.

Property experts say first-time buyers and Bank of Canada rate cuts have helped restore stability to a market that slumped from late 2008 to early this year, when the worst leg of the global financial crisis battered consumer confidence.

"We should be less fearful than we were six months ago, but I don't think we should be exuberant yet. The resale markets in Canada are very strong. May numbers were pretty good, and June numbers will be even better," said Will Dunning, an economic consultant who specializes in the housing market.

"But by July and into the fall there will be an offset of considerably slower activity. I don't think it's likely to go off a cliff. It'll depend on what happens in employment and the broader economy, and how that affects confidence."

Recent data suggests Canada's residential property market, which weathered the financial crisis much better than its hard-hit U.S. counterpart, has been thawing for several months.

The latest Canadian Real Estate Association data shows May resale home prices rose 0.4% to $319,757, topping the previous record set a year earlier. It was the first year-over-year increase since May last year. And sales activity climbed for a fourth straight month.

The industry group, which represents more than 97,000 real estate brokers and agents, also cut its forecast for a drop in home prices this year and said it expected sales activity to trend higher.

Meanwhile, Canada Mortgage and Housing Corp., the national housing agency, forecast in its second-quarter outlook that new home construction is expected to decline to 141,900 units in 2009 but rebound next year.

Still, no one predicts the residential property market is headed back to the heady times seen between 2002 and 2007, when prices surged and outpaced income growth. In some cities, such as Vancouver, British Columbia, and Calgary, Alberta, home prices doubled and are now going through a sharp correction.

A "stable but unremarkable" period for the real estate market is expected this year, said Philip Soper, chief executive officer of Brookfield Real Estate Services, an arm of Canadian property giant Brookfield Properties Corp. that holds real estate broker brand Royal LePage.

"Stability is something you can't overemphasize in terms of its importance for the housing market right now."

Unless the global financial system succumbs to another crisis, analysts expect the Canadian home market is likely to stabilize further.

Activity from first-time buyers appears to be providing support because of stimulative measures by the federal government that allow these buyers to defray closing costs and withdraw more from retirement funds.

The Bank of Canada has also pledged to keep interest rates near zero until mid-2010, which could underpin confidence.

But the economy is still on shaky ground, contracting for the ninth straight month in April. And the unemployment rate spiked to an 11-year high in May, boosted by massive layoffs in the factories of Ontario.

Experts warn that further job losses in pockets of Canada's export-oriented economy could slow the momentum that has been gathering in the housing sector.

"We don't expect the recession to end until the fall. It's clear that the spring fling in housing markets, this remarkable surge in resales and prices, has been driven by record low mortgage rates," said Sal Guatieri, senior economist at BMO Capital Markets.

These record low rates, whether variable or fixed, had increased affordability for many buyers. But weakness in the bond market, caused in part by reduced investor demand for safe-haven assets, has pushed mortgage rates higher.

The posted rate on a five-year mortgage at Royal Bank of Canada, the country's largest lender, has risen to 5.85% from 5.25% in April.

Brookfield's Mr. Soper has been telling his management team to prepare for softness in the housing market in the second half.

"The advice I have been giving ... is to accept the recovery this spring with humility, to continue to plan for a difficult second half of the year although the comparables are going to be positive simply because the second half of 2008 was so poor," he said in an interview.

"But at least we have a stable market and stable prices, which is something that you need to encourage consumers to trade."

Now it can be said – the US is officially in a recession, and other countries around the globe are very quickly following suit. Predominating the country’s financial headaches is the real estate meltdown, or subprime crash, as experts call it. The question being asked is, was overinflated real estate the cause of the US and ultimately the global recession? If so, how?


New York Times economics columnist David Leonhardt explains it this way: In 1998, Wall Street started making it easier for home buyers to apply for loans, and packaged those loans to global investors as CDOs, or collateralized debt obligations. To make these investments even more enticing, Wall Street introduced the idea of subprime mortgages - ARM (adjustable rate mortgage) loans with high interest rates packaged in the guise of low initial interest rates.

High interest rates for the borrowers meant higher returns for the investors, while low credit score borrowers now had the opportunity to buy homes despite their normally unacceptable credit picture. The lax lending policies allowed people to borrow as much as 50% more than the real value of the house with a minimal down payment even as the high interest rates pushed prices up, resulting in grossly overpriced home prices. A case in point is San Francisco, where the median home price is currently 11.6% of the median annual salary.

Investors sought to accelerate their earnings by borrowing funds to invest. The extremely high loan interest rates caused many of the borrowers to default on their loans, and as home prices reached the point where borrowers couldn’t afford to pay their loans anymore and people stopped buying because prices were just way too high, the financial village came toppling down, one by one in a domino effect.

First to fall were Fanny Mae and Freddie Mac, the country’s two largest mortgage finance lenders that had bought the loans from the mortgage originators, repackaged them as mortgage-backed securities, and sold them to the global investors. Next came the banks and investment companies with heavy exposures on these sub prime loans such as Bear Stearns and Lehman Brothers, and as the banks fell so did the global investors who had invested in these mortgage investments. As the companies fell, investors panicked and engaged in a wave of selling, causing the stock markets to crash.

Industry insiders say that unless the number of foreclosures goes down, home prices will continue to decline and it will take longer before the real estate crisis bottoms out.

The S&P/Case-Schiller Home Price Indices show that home prices continue to fall – as of May, Phoenix reported an annual decline of 31.9%, Las Vegas was down 31.3%, San Francisco down by 29.5%, Miami down by 28.4%, Los Angeles down by 27.6%, and San Diego 26.3%.

With more and more companies downsizing workforces, it looks like we’re in for quite a long wait. In the meantime, here’s our advice: if you’ve got a home, hold on to it. If you’re in the market to buy a house, do your due diligence and homework – compare prices, read the fine print, and make sure you can afford to pay before you sign that loan.

Housing starts rose more than expected in May, with increased construction seen in both single and multiple dwelling sectors, according to Canada Mortgage and Housing Corporation.

The seasonally adjusted annual rate of starts increased to 128,400 units during the month from 117,600 in April, CMHC said Monday.

"Housing starts are expected to improve throughout 2009 and over the next several years to gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year," the Crown corporation said.

Economics expected housing starts to total 126,000 units in May.

The seasonally adjusted annual rate of urban starts was up 11.1% to 107,800 units in May, CMHC said. Multiple unit urban starts rose to 60,900 units and single unit starts increased to 46,900 units -- with both categories rising by a similar 11.1% from the previous month.

"The increase in May is broadly based, encompassing both the singles and multiples segments," said Bob Dugan, CMHC's chief economist.

Overall urban starts were up 22% in Ontario, 16.8% in the Prairies, 7.3% in Atlantic Canada and 3.3% in Quebec. Meanwhile, urban starts fell 5% in British Columbia.

Rural starts were little changed at 20,600 units in May.

"The broad-based nature of the increase in residential construction activity in May was an encouraging development for this beleaguered sector of the Canadian economy," said Millan Mulraine.

"Indeed, after plunging precipitously since late 2007, and appearing to be in free-fall in recent months, this rebound may be an indication that the sector is perhaps stabilizing.

"Nevertheless, with the Canadian labour market continuing to weaken and the overall economy remaining quite soft, we expect residential building activity to remain in the current depressed range for some time."

TABLE

Housing starts in May (seasonally adjusted):

Canada, all areas 128,400

Canada, rural areas 20,600

Canada, urban centres 107,800

Canada, singles, urban centres 46,900

Canada, multiples, urban centres 60,900

Atlantic region, urban centres 7,300

Quebec, urban centres 34,200

Ontario, urban centres 41,600

Prairie region, urban centres 15,300

British Columbia, urban centres 9,400