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Who's afraid of higher interest rates? Not Canadian home buyers, says CMHC

OTTAWA - The cost of buying a home continued to inch skyward Monday as two of Canada's biggest banks raised mortgage rates, one more ominous sign that home ownership is about to get a bit less hospitable.

OTTAWA - The cost of buying a home continued to inch skyward Monday as two of Canada's biggest banks raised mortgage rates, one more ominous sign that home ownership is about to get a bit less hospitable.

Royal Bank and TD Canada Trust each bumped up their rates by between nearly a seventh and a quarter of a percentage point, the third recent increase amid higher borrowing costs on the bond market, where banks finance their mortgage lending.

The increases came just as a new online survey offered a snapshot of the halcyon days of February, when rates were at rock bottom and Canadians active in the mortgage market, including first-time buyers, didn't seem to have a care in the world.

The annual survey by Canada Mortgage and Housing Corporation, which predates the latest wave of rate increases, suggested that respondents were not only comfortable with their level of debt, but two thirds of them expected to pay their loans off sooner than required.

"Let's face it, over the last month, Canadians have been hit with a wave of stories of mortgage rate increases or the possibility of tighter or higher interest rates and that's clearly had some effect on consumer confidence," said Doug Porter, deputy chief economist at the Bank of Montreal.

While only a small percentage reported being concerned about their mortgage debt, the actual number of those who are vulnerable will grow as mortgage rates climb over the next year, he added.

The CMHC survey also suggested that Canadians have become savvy consumers when it comes to buying a home. On average, those surveyed said they took a year to think through their decision; 89 per cent reported using the Internet to research their mortgage options.

"First time home buyers, they do their homework," said Pierre Serre, the CMHC's vice president of insurance product and business development.

"People are getting more into the Internet, people are getting informed and people are comfortable with home ownership."

The survey found that 81 per cent of respondents reported being "comfortable" with their level of debt.

The housing market has been one of the mainstays of the economic recovery, with prices and sales already back, and in some markets, beyond pre-recession levels.

In a separate report Monday, the real estate brokerage firm Re/Max said luxury home sales had soared in the first quarter of 2010, with nine of 13 markets shattering records for the winter months.

Kelowna, B.C., led the way in terms of percentage increase at 700 per cent, followed by Montreal at 300 per cent, Victoria at 275 per cent and Toronto at 263 per cent.

"Recovery in the upper end has been nothing short of remarkable," said Elton Ash, the regional vice-president for Re/Max in western Canada.

Home-buying enthusiasm has raised concerns at the Bank of Canada about super-low interest rates luring some into taking on more debt than they can afford. Although affordability remains high, given the low rates, household debt has risen to a record $1.47 per $1 of disposable income.

Bank governor Mark Carney and his deputies have warned that would-be buyers need to know they can afford not only their current mortgage payment, but whatever their payments will be when interest rates rise.

The central bank has hinted it may start raising its policy rate as early as June 1, but the chartered banks have increased longer-term, closed and some variable mortgages by close to a percentage point.

The CMHC survey of 2,500 who have actually taken out a first mortgage, or renewed their mortgage in the last year, strongly suggested they did so with eyes wide open.

Among first-time buyers, 85 per cent said they had a good understanding of how much of a mortgage they could afford.

The results weren't surprising to CIBC economist Benjamin Tal, who recently researched the housing market for his bank. Tal's report tended to undercut concerns that Canadians were significantly vulnerable to rising interest rates.

"The number of people who are really, really vulnerable is a relatively small number," he said,.

"Clearly, when you have a situation of interest rates rising there will be defaults rising, but it will not be over the cliff like the U.S., it will not be a crisis."

Tal says Canadians traditionally adopt a variety of strategies to rising rates, including locking in to longer-term fixed mortgages, something he says is already occurring.

The other difference between the Canadian situation and that of the U.S., where the sub-prime crisis triggered a financial market meltdown, is that lower-income Canadians tend to be more conservative than higher-income buyers, said Tal.

Unlike in the U.S., lower-income Canadians tend to take out fixed-rate mortgages, he said.

-With files from Sunny Freeman in Toronto

 
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