Flaherty warns of even higher mortgage rates

The Canadian Press - http://www.ctv.ca/CTVNews/Canada/20110208/housing-market-110208/

Date: Tue. Feb. 8 2011 10:11 PM ET

OTTAWA — The Royal Bank of Canada became the third major Canadian bank to hike its five-year mortgage rate Tuesday, and Finance Minister Jim Flaherty is warning of further increases in the months ahead.

RBC joined TD Bank and CIBC in raising its posted rate for a five-year closed mortgage by one quarter of a percentage point to 5.44 per cent. The bank also raised a number of its other posted and special mortgage rates Tuesday.

Finance Minister Jim Flaherty said the hikes are "exactly what we expected."

Speaking outside the House of Commons Tuesday, Flaherty told reporters that with lending rates at historic lows, there is nowhere for the cost of borrowing to go but up.

"We're likely to see higher interest rates as we go forward because interest rates are still very low," Flaherty said.

The banks pin the hikes on a rebound in the stock market that has led to rising government bond yields, signs the economy is continuing its slow but sure recovery from the recession.

"It's gaining some traction and as the economy recovers, interest rates begin that process of returning to more normal levels," Derek Burleton, TD Bank deputy chief economist told CTV News.

While experts have predicted a cooling in the housing market after tighter mortgage rules come into effect in mid-March, a new report predicts that growing consumer confidence may offset the expected negative effects of higher interest rates.

The Canadian Real Estate Association released a revised forecast Tuesday for Canadian home sales in 2011, which the agency predicts will be higher than it first predicted last year.

Its new forecast estimates that 439,000 existing homes will be sold in 2011, down 1.6 per cent from 2010 but an improvement on the nine-pet-cent decline predicted in December.

And unlike some economists, who predict that home prices will level off, or drop sharply, as rates shoot up, the CREA predicts that the average home price will rise by 1.3 per cent in 2011 to $343,000. In its earlier forecast, the agency predicted that the national average home price would fall by 1.3 per cent compared to 2010, to $326,000.

"Even though mortgage interest rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity," said Gregory Klump, the CREA's chief economist. "Strengthening economic fundamentals will keep the housing market in balance, which will keep home prices stable."

With a report from CTV's John Vennavally-Rao