How to reduce property taxes

Homeowners who feel the assessed value of their property assessment is too high should appeal. I did and have saved myself $15 a month in a process that took some time, but wasn’t overly complicated.

In August, I bought my first house, a beautifully renovated three-bedroom bungalow in Scarborough which cost $425,000. I loved everything about it, except the property taxes which came in at more than $3,000 a year. In October when I received my property assessment notice I discovered the assessment and my taxes were going up. The assessed value was $65,000 higher than my purchase price.

My father’s two-storey century house in the Beach area had only been assessed at $100,000 more. It didn’t seem fair, so I decided to appeal.

First I visited AboutMyProperty.ca and the property taxes section of Toronto.ca I spoke with family and friends and contacted my real estate agent and mortgage broker to get their opinion. They agreed that the assessment was high.

I phoned the Municipal Property Assessment Corp. (MPAC) and requested a copy of the Comparable Property Report. The report included six similar properties in my neighbourhood handpicked by MPAC. Although the assessed values were similar, most were in more desirable locations. My house is located near an arterial road, while the comparable properties are steps away from the pricey Scarborough Bluffs. I made note of this, as location is one of the five major factors that account for 80 per cent of your property’s value, according to MPAC.

I was convinced my neighbourhood was overvalued, so I requested a copy of the home appraisal from my lender. My appraisal included everything I needed: comparable properties, photos and the estimated value. I also requested a report of similar properties that had recently sold in my neighbourhood from my real estate agent.

Once I was ready to file my appeal, I downloaded a copy of the Request for Reconsideration form from AboutMyProperty.ca. The form was pretty straightforward, although I made sure to include as many reasons as possible as to why I believed my assessment should be lower.

For example, my property is near apartment buildings, while MPAC’s comparable properties are surrounded by properties that sell for over $1 million. I submitted the Request for Reconsideration form online in November, well ahead of the March 31st deadline and included a copy of my home appraisal and photos of my neighbourhood.

In January I received a notice in the mail. Much to my delight my assessment value had been lowered by a whopping $74,000. According to MPAC, the adjustment was based on the similar properties I included.

Filing an appeal was time-consuming, but well worth it. I’ll save at least $700 in property taxes over the next four years, money I can put towards my mortgage.

How to appeal your property assessment

1.Compare your assessed value with similar properties in your neighbourhood to determine if it’s overvalued.

2.Visit AboutMyProperty.ca and Toronto.ca to learn more about your property assessment.

3.Request the Comparable Properties Report from MPAC.

4.Request your home appraisal from your lender and request a report of similar properties that have recently sold from your real estate agent.

5.When filing your Request for Reconsideration, include compelling reasons and supporting documentation, such as recent home appraisals and photos.

(By: Sean Cooper)

Calgary MLS sales soar in June

Transactions up over 30% from a year ago

CALGARY — Calgary’s residential real estate market experienced a significant upswing in sales in June compared with a year ago.

Single-family MLS sales during the month were 1,398, up 32.01 per cent from June 2010’s 1,059 transactions, according to data released by the Calgary Real Estate Board on Monday.

And for the first time since April 2010, condo sales were up year-over-year, increasing by 30.56 per cent in June to 581 transactions. In June 2010, there were 445 condo sales.

The average sale price for a single-family home in June dropped by 0.33 per cent year-over-year falling to $479,580 from $481,960.

But the condo average rose by 0.79 per cent to $296,501 from $292,182 a year ago.

June’s condo average condo price was the highest since May 2010.

According to CREB, June’s year-over-year increase in single-family home sales was the highest since January 2010’s 38.50 per cent while for the condo market it was the highest since March 2010’s 36.26 per cent.

On a year-to-date basis, single-family home sales for the first six months of this year are up 5.64 per cent from a year ago to 7,231 transactions while condo sales are down 4.91 per cent to 2,965 units.

“Strong monthly increases does not imply a housing boom, as it is important to put into perspective that sales activity remains below long-term averages,” said CREB in a statement.

Sano Stante, president of the Calgary Real Estate Board, said the housing market in Calgary has gradually improved throughout the year as anticipated.

“We had a late spring market this year,” he said. “It’s all starting to come together in June. And last year we had an exuberant market early on and it died in June. So to draw comparisons year-to-year for that month shows an exaggeration of the trend.”

After the first half of the year, it appears the recovery in the housing market is starting to find its footing, he added.

“This gradual levelling has been fuelled by growth in employment, and in particular growth in full-time jobs. Improved job prospects, combined with an increase in the number of people moving to Calgary, will give lift to our housing market for the remainder of this year and into the next.”

Stante said homes that are value-priced are selling and they’re moving relatively quickly. Homes that are over-priced are sitting on the market, he added.

Dan Sumner, economist with ATB Financial in Calgary, said a year-over-year comparison may be a little misleading as to the strength of the Calgary housing market in June specifically. June is often one of the busiest months for sales volumes but sales last June were abnormally slow, he explained.

“Fuelling sales is a stronger economy specifically in Alberta, which feeds through into consumer confidence and that’s making Albertans more comfortable with home purchases again. Very accommodative interest rates are also helping as well,” added Sumner.

He said prices have been stable for quite some time now, despite a fairly strong economy over the past year. Because housing prices have risen so much over the past 10 years in Alberta, they are about as high as they can be, he said.

“However, with the economy fairly strong in Alberta and rates increasing affordability, for the time being at least, that is preventing prices from moving any lower. What you end up with is resistance for prices to move in either direction, and flatness ensues,” said Sumner.

The key economic contributors to the current housing market include a strong energy sector and resource prices as well as an improving labour market and strong wage growth. Also interprovincial migration to Alberta has picked up, said Sumner.

“With economic conditions in Alberta strong and looking up, sales during the second half of 2011 should be higher than last year,” he said.

Richard Cho, senior market analyst for Calgary for Canada Mortgage and Housing Corp., said that although demand for housing has been gradually improving, resale activity this time last year was also moderating.

mtoneguzzi@calgaryherald.com

Things you think add value to your home - but really don't

Every homeowner must pay for routine home maintenance, such as replacing worn-out plumbing components or staining the deck, but some choose to make improvements with the intention of increasing the home's value.

Certain projects, such as adding a well thought-out family room - or other functional space - can be a wise investment, as they do add to the value of the home. Other projects, however, allow little opportunity to recover the costs when it's time to sell.

Even though the current homeowner may greatly appreciate the improvement, a buyer could be unimpressed and unwilling to factor the upgrade into the purchase price. Homeowners, therefore, need to be careful with how they choose to spend their money if they are expecting the investment to pay off. Here are six things you think add value to your home, but really don't.

Swimming Pools

Swimming pools are one of those things that may be nice to enjoy at your friend's or neighbour's house, but that can be a hassle to have at your own home. Many potential homebuyers view swimming pools as dangerous, expensive to maintain and a lawsuit waiting to happen.

Families with young children in particular may turn down an otherwise perfect house because of the pool (and the fear of a child going in the pool unsupervised). In fact, a would-be buyer's offer may be contingent on the home seller dismantling an above-ground pool or filling in an in-ground pool.

An in-ground pool costs anywhere from $10,000 to more than $100,000, and additional yearly maintenance expenses need to be considered. That's a significant amount of money that might never be recouped if and when the house is sold.

Overbuilding for the Neighbourhood

Homeowners may, in an attempt to increase the value of a home, make improvements to the property that unintentionally make the home fall outside of the norm for the neighbourhood. While a large, expensive remodel, such as adding a second story with two bedrooms and a full bath, might make the home more appealing, it will not add significantly to the resale value if the house is in the midst of a neighbourhood of small, one-storey homes.

In general, homebuyers do not want to pay $250,000 for a house that sits in a neighbourhood with an average sales price of $150,000; the house will seem overpriced even if it is more desirable than the surrounding properties. The buyer will instead look to spend the $250,000 in a $250,000 neighbourhood. The house might be beautiful, but any money spent on overbuilding might be difficult to recover unless the other homes in the neighborhood follow suit.

Extensive Landscaping

Homebuyers may appreciate well-maintained or mature landscaping, but don't expect the home's value to increase because of it. A beautiful yard may encourage potential buyers to take a closer look at the property, but will probably not add to the selling price. If a buyer is unable or unwilling to put in the effort to maintain a garden, it will quickly become an eyesore, or the new homeowner might need to pay a qualified gardener to take charge. Either way, many buyers view elaborate landscaping as a burden (even though it might be attractive) and, as a result, are not likely to consider it when placing value on the home.

High-End Upgrades

Putting stainless steel appliances in your kitchen or imported tiles in your entryway may do little to increase the value of your home if the bathrooms are still vinyl-floored and the shag carpeting in the bedrooms is leftover from the '60s. Upgrades should be consistent to maintain a similar style and quality throughout the home.

A home that has a beautifully remodeled and modern kitchen can be viewed as a work in project if the bathrooms remain functionally obsolete. The remodel, therefore, might not fetch as high a return as if the rest of the home were brought up to the same level. High-quality upgrades generally increase the value of high-end homes, but not necessarily mid-range houses where the upgrade may be inconsistent with the rest of the home.

In addition, specific high-end features such as media rooms with specialized audio, visual or gaming equipment may be appealing to a few prospective buyers, but many potential homebuyers would not consider paying more for the home simply because of this additional feature. Chances are that the room would be re-tasked to a more generic living space.

Wall-to-Wall Carpeting

While real estate listings may still boast "new carpeting throughout" as a selling point, potential homebuyers today may cringe at the idea of having wall-to-wall carpeting. Carpeting is expensive to purchase and install. In addition, there is growing concern over the healthfulness of carpeting due to the amount of chemicals used in its processing and the potential for allergens (a serious concern for families with children). Add to that the probability that the carpet style and colour that you thought was absolutely perfect might not be what someone else had in mind.

Because of these hurdles, wall-to-wall carpet is something on which it's difficult to recoup the costs. Removing carpeting and restoring wood floors is usually a more profitable investment.

Invisible Improvements

Invisible improvements are those costly projects that you know make your house a better place to live in, but that nobody else would notice - or likely care about. A new plumbing system or HVAC unit (heating, venting and air conditioning) might be necessary, but don't expect it to recover these costs when it comes time to sell.

Many homebuyers simply expect these systems to be in good working order and will not pay extra just because you recently installed a new heater. It may be better to think of these improvements in terms of regular maintenance, and not an investment in your home's value.

The Bottom Line

It is difficult to imagine spending thousands of dollars on a home-improvement project that will not be reflected in the home's value when it comes time to sell. There is no simple equation for determining which projects will garner the highest return, or the most bang for your buck.

Some of this depends on the local market and even the age and style of the house. Homeowners frequently must choose between an improvement that they would really love to have (the in-ground swimming pool) and one that would prove to be a better investment. A bit of research, or the advice of a qualified real estate professional, can help homeowners avoid costly projects that don't really add value to a home.

(Jean Folger, Investopedia.com)

Canadian mortgage debt rises to over $1 trillion on high prices, low interest

Low interest rates and a hot housing market helped push Canada’s total residential mortgage debt to a record $1 trillion this year, but a cooling real-estate market is expected to slow further accumulation, says the chief economist of Canada’s mortgage industry association.

The value of outstanding mortgages is now 7.6 per cent higher than it was last year, the Canadian Association of Accredited Mortgage Professionals said in its annual report released Monday.

“We’re still seeing a lot of movement into home ownership and that’s what’s driving the growth of debt,” said Will Dunning, CAAMP’s chief economist.

“The growth will gradually decelerate but we’re still looking at rates of six and a half per cent or so, so still fairly rapid,” Dunning said.

This year’s growth was higher than the average annual increase is around 7.1 per cent. However, it is still much lower than it was in the early 2000s, when debt growth hovered closer to 10 per cent year over year.

Higher home prices drove many Canadians to borrow heavily to finance-purchases, while a low interest rate environment encouraged others to refinance loans and consolidate debt, the CAAMP report said.

The low interest rate environment has enabled some consumers to take on bigger mortgages than they might otherwise have been able to carry, while it has encouraged others to borrow against their homes.

Recent housing market data points to a massive downshift in housing market activity.

Less activity in Canada’s resale home market and moderating housing starts will mean fewer people taking on new mortgages, Dunning said.

“That (slowdown) now and in the near future going to result in less mortgage takeout as those sales get closed,” he said.

Canada’s housing market has been on a tear for much of the past year after the Bank of Canada sent its trend-setting policy rate to an emergency low of 0.25 per cent to stimulate borrowing and consumer spending.

Buyers, spurred by easy access to relatively cheap borrowing, rushed into the market and competed aggressively for homes, which drove prices to record highs.

The market has been cooling in recent months as many sales were pushed ahead to the beginning of the year in advance of tighter mortgage qualification rules, a new tax regime in B.C. and Ontario and higher interest rates.

Meanwhile, the Bank of Canada’s policy rate has been hiked three times to one per cent, still historically low. The central bank is expected to take a pause on rate hikes until the middle of next year, giving mortgage holders more time to refinance at low rates.

Most Canadians have heeded warnings from economists — including the Bank of Canada — about growing debt levels and took advantage of low interest rates to refinance and pay off other debts, CAAMP said.

The report found 18 per cent of mortgage holders have taken equity out of their homes to free up extra cash. Almost half of mortgage holders who borrowed against their homes cited a need for “debt consolidation or repayment” and the average amount borrowed against home equity was $46,000.

The association said that most mortgage holders appear to be comfortable with their debt levels and that the vast majority — about 84 per cent — said they could afford at least a $300 or 30 per cent increase in their monthly mortgage payment, Dunning said.

The association asked approximately 2,000 Canadians surveyed how much of an interest rate hike they could withstand. The average Canadian monthly mortgage payment is about $1,025 and the average homeowner has room for $1,056 per month on top of current costs, the report found.

However, about 350,000 out of 5.65 million, or about six per cent of Canadian mortgage holders, would be challenged by rate rises of less than one per cent, CAAMP said.

“Most of the people who have low tolerances for increased payments have fixed-rate mortgages,” the reports said. (So) by the time their mortgages are due for renewal, their financial capacity will have expanded and their mortgage principal will have been reduced.”

Canadians continue to favour fixed-rate mortgages and a five-year fixed-rate mortgage remains the most popular option despite the fact that variable rates have become much less expensive than fixed rates, the report found.

Mortgage loophole helps first-timers

There is a small loophole in the new federal mortgage rules that could make it easier for the banks to lend out money to first-time buyers.

The federal government announced last month new requirements for anyone borrowing money for a house and needing mortgage insurance. If you have less than a 20% down payment and are borrowing from a financial institution covered by the Bank Act, you have to take out mortgage default insurance, which ensures the banks are covered for any losses resulting from payment defaults.

For principal residences, the new rules force consumers to qualify for a loan based on being able to make payments on a five-year fixed-rate mortgage, which has a much higher interest rate than variable mortgages, now as low 1.85%.

Clearly, Ottawa’s view was toward rising rates. And this week, two of the major banks raised their posted rate on five-year fixed mortgages to 5.85%.

But one lingering question is how the five-year rate would be calculated in terms of qualifying a customer. In other words, it would obviously be a lot tougher to qualify for a mortgage under the new rules when using the posted rate of 5.85%. But if using the actual rate consumers get -- these days as low as 3.75% -- that’s a lot less income you’ll need to buy your first home.

Officials in Ottawa have been mum on what numbers should be used.

But an internal document distributed by Canada Mortgage and Housing Corp. to mortgage brokers, obtained by the Financial Post, shows consumers will be able to use their actual rate to qualify for a mortgage if they go for a term five years or longer.

If buyers want a variable-rate mortgage, they will have to qualify based on “the benchmark rate,” which is essentially the posted rate.

So, if you want to go short, you had better be able to make payments based on an interest rate as high as 5.85%, which is where the benchmark rate will likely sit by next week.

“Probably 10% of the overall mortgage population is going to be affected by this rule in the sense they are no longer going to be able to qualify for a variable-rate mortgage or a one- to four-year term,” says Robert McLister, editor of Canadian Mortgage Trends. “The qualifying rate is going to affect the debt ratios of those people.”

The end result may see more people forced to lock in their rate, which is hardly fair given variable-rate mortgages have been a better deal than fixed-rate rate mortgages about 88% of the time over the past 50 years, before the recent credit crisis.

“This will help people become accustomed to making payments based on where mortgage payments are likely to be going,” said Peter Vukanovich, chief executive of Genworth Financial Canada, the mortgage insurer.

He doesn’t think the changes are a major deal, given that most of the major banks have been qualifying consumers based on their four- and five-year rates. His company was already only insuring products based on rates as high as 4%.

“It’s a good rule change when you are situation right now where we are increasing interest rates,” says Jim Smith, vice-president of Scotia Mortgage Authority. “Most lenders, ourselves included, have qualified based on at least the three-year posted rate.”

The discrepancy is, the three-year posted rate at most banks is actually higher than the five-year discounted rate.

And that means it is actually going to get easier to get a mortgage -- as long as you do what the government tells you to do and lock in your rate.

(By Garry Marr, Financial Post)

Interest rate hike this summer?

Don't count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast.

Canadian market watchers will get some good news this week. The predictions for a "blowout" reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.

This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the "output gap" being 3.7 per cent ("output gap" is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.

The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank's modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.

Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.

Unless the bank wants to be pre-emptive - highly unlikely when it acknowledges in its economic outlook last week that "the recovery continues to depend on exceptional monetary and fiscal stimulus" and that "the overall risks to its inflation projection are tilted slightly to the downside" - then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less "hawkish" than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.

The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.

And whatever future "policy tightening" is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: "The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada," the bank says.

In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.

The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: "Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.

Until then, homeowners opting for variable rate mortgage financing will likely not have to face the interest rate music.

(By David Rosenberg, chief strategist for Gluskin Sheff & Associates Inc. and a guest columnist for Report on Business).

November sales, prices dwarf year-ago levels

Calgary housing market surging

One year ago, the downturn in the Calgary residential real estate market was beginning to take hold on the heels of a global financial market meltdown.

But just two weeks into November, preliminary housing sale numbers indicate how dramatically the market has turned since then.

Sales in November of this year will eclipse those for November 2008. And at this pace, average sale prices will also be up from a year ago.

"It has a lot to do with the low mortgage rates," said Nikki Harrison, a realtor with Re-Max Realty Professionals, adding that has stimulated buyers to purchase homes. Last year at this time, the bad and uncertain economic news contributed to people sitting back and not moving, but now the overall outlook for consumers is more positive.

"We're definitely optimistic that things are starting to change," she said Friday at a home listed by realtor Ted Greenhough she is helping market for $1.2 million in the northwest Tuxedo neighbourhood.The numbers seem to back up Harrison's outlook for the Calgary real estate market.

According to the website of Mike Fotiou, of First Place Realty, so far this month until Nov. 18 there have been 662 single-family home sales for an average sale price of $470,774. For the entire month of November last year, there were 670 sales at an average price of $435,471.

Condo sales have already surpassed last-year levels. This month there have been 292 transactions at an average sale price of $300,118. November 2008 recorded 284 sales for an average of $285,820.

"It's very difficult to predict what's going to happen in this market because it's rather volatile as far as interest rates(and where they're) going. We're not really sure and we're just very optimistic that it will continue to get better," said Harrison.

The more positive trend in the local real estate market has been seen since May, beginning six consecutive months of year-over-year sales increases for both the single-family and condo markets.

"Obviously, sales activity continues to remain fairly steady," said Richard Cho, senior market analyst in Calgary for Canada Mortgage and Housing Corp. "The presence of lower mortgage rates continues to benefit the home buyers toward sales growth.

"The economy in general is also showing more signs of improvement. Employment levels on a seasonally adjusted basis have started to trend upwards and employment growth is also one of the primary drivers of housing demand."

The year-over-year gain in sales may appear a bit pronounced in November as sales activity began to slow at the end of 2008, added Cho.

Todd Hirsch, senior economist with ATB Financial in Calgary, concurred that low mortgage rates continue to have a dramatic impact on the residential real estate market. "There is a sense, a correct sense, that these mortgage rates aren't going to stay this low forever, so people are getting in, I guess, while the getting's good. They know that if they wait too much longer, like another year, those rates are going to start to go up," said Hirsch.

Another factor for the housing market, he said, is that the city and the province continue to have positive in-migration numbers. "That's helping when they move here," said Hirsch. "They're not stampeding in like they were in 2006, but they're still moving to Alberta and to Calgary and putting some upward pressure, especially at that entry-level home buyers--the condo market or the smaller single-detached home. That's adding some lift to the market there, too."

(By Mario Toneguzzi, Calgary Herald)

Homes sales hit record high; outlook upgraded

November, 17, 2009.

OTTAWA -- Home sales hit a new record high in October, leading the Canadian Real Estate Association to boost its outlook for 2009 and 2010.

Resale home activity was up 41.5% in the month, reaching a total of 42,288 units. On a seasonally adjusted basis, homes sold on the Multiple Listing Service totalled 45,818 units in October.

"Low interest rates and upbeat consumer confidence continue to release the pent-up demand that built late last year and earlier this year," said CREA president Dale Ripplinger. "The release of that pent-up demand has boosted national sales activity to new heights and is drawing down inventories."

Further, said Millan Mulraine, economics strategist at TDSecurities, "we expect the recent strong gains in the housing market to remain largely intact, though we suspect that the back-to-back double-digit advance in sales seen earlier this year may not be repeated."

As a result of the sector's strong performance, CREA increased its forecast for sales in 2009 by 6.6% to 460,200 units. For 2010, the national industry group said sales would rise 7% to 492,300 units.

The average home price also reached new highs in October, climbing to $341,079, up 20.7% from a year ago.

A separate measure, which limits its focus to Canada's major markets, showed the average price rising 22.1% to $373,095.

At the same time, the sharp rise in housing demand has eaten into inventories. With 194,994 homes listed for sale in Canada at the end of October, the number of listings is 20.8% below the peak reached in October of last year.

It is the sixth month in a row in which inventories have fallen from year-ago levels, bringing supply to 4.1 months on a seasonally adjusted basis, the lowest level in more than two years.

CREA chief economist Gregory Klump said new listings are expected to rise in coming months in response to headline average price increases.

New monthly sales records were set in about one fifth of local markets in October, including Toronto, Montreal and Ottawa. On a provincial basis, new records were set in British Columbia, Ontario and Quebec, largely as a result of increased activity in those provinces' major markets.

(John Morrissy, Financial Post)

The Home Renovation Tax Credit

Home renovations are smart investments in the long term value of a home and also create
economic activity by increasing the demand for labour, building materials and other goods. Renovations can also reduce energy consumption and the long ­term cost of owning a home.

To provide some $3 billion of much­ needed fiscal stimulus and encourage investments in Canada’s housing stock, Budget 2009 proposes to implement a temporary Home Renovation Tax Credit (HRTC).

Temporary, Timely and Targeted Stimulus

The HRTC will apply to eligible home renovation expenditures for work performed, or goods acquired, after January 27, 2009 and before February 1, 2010, pursuant to agreements entered into after January 27, 2009. The temporary nature of the credit will provide an immediate incentive for Canadians to undertake new renovations or accelerate planned projects.
The HRTC can be claimed for renovations and enduring alterations to a dwelling, or the land on which it sits.

How the HRTC Will Work

The 15­ per­cent credit may be claimed on the portion of eligible expenditures exceeding $1,000, but not more than $10,000, meaning that the maximum tax credit that can be received is $1,350.

The credit can be claimed on eligible expenditures incurred on one or more of an individual’s eligible dwellings.

Properties eligible for the HRTC include houses, cottages and condominium units that are owned for personal use.

Renovation costs for projects such as finishing a basement or re­-modelling a kitchen will be eligible for the credit, along with associated expenses such as building permits, professional services, equipment rentals and incidental expenses.

Routine repairs and maintenance will not qualify for the credit. Nor will the cost of purchasing furniture, appliances, audio­ visual electronics or construction equipment.

Who Can Claim the HRTC?

About 4.6 million families in Canada are expected to benefit from the credit. Taxpayers can claim the HRTC when filing their 2009 tax return. Eligibility for the HRTC will be family ­based. For the purpose of the credit, a family is generally considered to consist of an individual, and where applicable, the individual’s spouse or common­ law partner. Family members will be able to share the credit.

Examples of HRTC Eligible and Ineligible Expenditures

Eligible

• Renovating a kitchen, bathroom, or basement

• New carpet or hardwood floors

• Building an addition, deck, fence or retaining wall

• A new furnace or water heater

• Painting the interior or exterior of a house

• Resurfacing a driveway

• Laying new sod


Ineligible

• Furniture and appliances (refrigerator, stove, couch)

• Purchase of tools

• Carpet cleaning

• Maintenance contracts (furnace cleaning, snow removal, lawn care, pool cleaning, etc.)

Examples of the Benefits of the Home Renovation Tax Credit

The following examples illustrate how homeowners can benefit from the HRTC

• Sally and Ed are a couple who have recently purchased a house. In response to the temporary HRTC, they decide to replace their old windows and improve the insulation in their home in 2009, instead of waiting, incurring $10,000 in expenditures. After taking into account the $1,000 minimum threshold, a 15­ per­cent credit will be available on $9,000 in eligible expenditures, providing tax relief of $1,350.

• William and Marie are a couple who are planning to purchase a more energy­ efficient furnace for their home, and build a deck at their cottage sometime later. To take full advantage of the temporary HRTC, they decide to do both projects in 2009 rather than waiting. They pay $5,000 for the furnace and $3,500 for the deck. They also decide to have the area around the deck landscaped for $2,500, bringing their total costs to $11,000 ($5,000 + $3,500 + $2,500).
Marie claims a credit of $1,350 on the maximum allowable amount of $9,000.

• Karen and Heather are sisters who share ownership of a condominium unit. They each incur $7,500 in expenditures renovating the kitchen in the condo. Karen and Heather each claim a $975 credit on eligible expenditures of $6,500 ($7,500 ­- $1,000).

How Can I Get More Information?

Additional information on the Home Renovation Tax Credit is be available on Canada Revenue Agency’s website at (www.cra.gc.ca).

Information is also available at www.fin.gc.ca

Canada home resales set July record, up 6th month

Sales of existing homes in Canada posted their biggest year-over-year gain in two years and rose for a sixth straight month in July, as low interest rates and an improving economy tempted buyers back.

In a first look at third-quarter sales, the Canadian Real Estate Association said on Friday that 50,270 homes changed hands in July, up 18.2 percent from the same month last year.

It was the first time that sales topped 50,000 units in July, and the number was 3.9 percent above the previous record for the month, set in 2007, the industry group said.

On a seasonally-adjusted basis, home sales rose at a slower pace in July, up 2.5 percent. Sales rose nearly 9 percent in June.

"National resale housing market activity continued on its upward trend in July, but its pace slowed from fullout sprint in months prior down to that of a 5K run," said Pascal Gauthier of TD Economics.

The report is the latest evidence that consumers are venturing back into the home market after a slump triggered by the recession. Low mortgage rates and signs that the worst of the slump is over are stimulating the market.

The association said demand is rebounding sharply in some of Canada's most expensive markets and that distorted the national average price upward. The average July resale price rose 7.6 percent from a year earlier to C$326,832 ($299,846).

"The difference in the resale housing market now, compared to the beginning of the year, is night and day, and nowhere is this more evident than in the West," said CREA president Dale Ripplinger.

Resale activity in Vancouver, British Columbia, surged 90 percent in July from a year ago, while Alberta cities Edmonton and Calgary posted a jump in sales of 28 percent and 22 percent, respectively.

New listings nationwide continued to fall, down 13 percent to 73,444 units from a year ago. Eight provinces reported higher prices, as did 18 of the 25 largest cities.

(TORONTO, Reuters, by Ka Yan Ng; editing by Janet Guttsman)

Bernanke: near term growth prospects good

U.S. Federal Reserve chief Ben Bernanke on Friday said prospects for a return to global economic growth looked good "in the near term," the clearest signal yet the world's most powerful central banker thinks a recovery is at hand.

"After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good," Bernanke told an annual Fed conference here in the shadows of the Grand Teton mountains.

"Although we have avoided the worst, difficult challenges still lie ahead," he said, cautioning that the "recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."

His remarks were a bit more upbeat than a statement from Fed policy-makers last week, and nodded toward private forecasts for a solid upturn in the second half of 2009, while stressing headwinds still face the global economy.

Bernanke said "critical challenges remain" from financial markets still strained from a severe crisis that broke two years ago. The difficulties households and businesses face in getting loans is another source of stress, he said.

The crisis highlights the need to "urgently" address structural weaknesses in the financial system, particularly in the way governments set rules and supervise it, he said. Bernanke delivered the remarks at a conference sponsored by the Kansas City Federal Reserve Bank that draws top central bankers from around the world, along with a Who's Who of economists.

Germany, France and Japan have pulled out of recession and the U.S. economy appears to be stabilizing after a devastating financial crisis and painful economic downturn that eliminated almost seven million U.S. jobs.

The Fed chopped interest rates to near zero in December and has pumped around $1 trillion into financial markets to combat the crisis and spur economic growth.

Earlier this month, the central bank said it would phase out its purchases of long-term U.S. Treasuries, one of the extraordinary measures it has used to revive the economy.

Its emergency action has gained traction. Data out on Friday showing a powerful jump in U.S. existing home sales in July to an annualized pace of 5.24 million units, notching the fastest rate in two years.

U.S. stock indexes rallied after Bernanke's speech and the better-than-expected housing data, with the benchmark S&P 500 index rising to new 10-month highs while Treasury bonds fell.

While the U.S. economy appears to be gaining health, analysts worry a recovery could prove fleeting.

Expectations for solid growth in the second half of the year reflect the impact of a government program to spur car buying and an anticipated restocking of inventories. U.S. consumer demand is still weak and unemployment is rising.

The Fed chairman's talk to an audience of peers at the annual Fed retreat outlined how central banks reacted to the series of flashpoints in the crisis. Without speedy actions by the Fed - some of which were "unfortunately unavoidable" - the panic could have intensified, he said.

"As severe as the economic impact has been, however, the outcome could have been decidedly worse," Bernanke said.

He said the Fed's moves to pump funds into frozen financial markets have promoted stability. Declining use of some of those emergency facilities since the beginning of the year is a "clear signal" that financial markets are normalizing, he said.

(Mark Felsenthal and Kristina Cooke, Reuters , JACKSON HOLE, Wyo. )

Why economists are watching the paint dry

Fortune tellers read tea leaves. Astrologers read stars. And economists searching for signs of the recession’s end are reading … white paint.

More specifically, they’re tracking the price of titanium dioxide, the substance that makes paint white. Titanium dioxide might not be a household name, and economists of course eye more widely watched indicators.

But white paint is seen by many as an economic barometer, given its widespread use in everything from house paints, cars and washing machines to railway cars, skyscrapers and airplanes.

If the price of titanium dioxide is doing well, the explanation goes, more white paint is selling, suggesting a pickup in economic activity.

So when the U.S. Department of Labor released monthly prices for TiO2 on Tuesday, many economists took note. The chemical’s price was actually down in June, but has fallen at a slower pace for three months in row.

“It’s in the top 10 of obscure indicators,” joked Richard Yamarone, an economist at Argus Research in New York. “But there’s a lot behind it. It’s not as silly as one may expect.”

Mr. Yamarone noted that white paint is used in such a cross-section of the economy, it’s important to watch. “I always knew it as the durable-good pigment,” he said.

Some major makers of titanium dioxide, such as Kronos Worldwide, Inc., are beginning to push through price increases, saying that demand has started to pick up.

The companies had been cutting back production and closing plants for months because of the recession.

Asked if titanium dioxide, which costs around $1.07 (U.S.) per pound, is a good indicator of economic activity, Mr. Yamarone replied: “Oh, sure, absolutely. You’ve got to remember, when you looking at any economic indicator, there is no perfect indicator. The best you can do is get maybe a top 10 list and observe all those at the same time.”

Mark Zandi, chief economist at Moody’s Economy.com, said he follows the price of titanium dioxide fairly closely: “It’s stretching a little bit, but I think it has historically been a good barometer of broader economic conditions.”

He noted that yesterday’s U.S. figures matched other signals about the economy making a slow recovery.

“It’s consistent with the idea that the economy is still soft. We are still in recession, but we’re headed in the right direction,” Mr. Zandi said.

Both Mr. Yamarone and Mr. Zandi said they follow even more obscure measurements than titanium dioxide prices.

Mr. Yamarone, for example, said one of the most important indicators he tracks is the sale of women’s dresses.

“The woman is traditionally the [chief financial officer] of a household. She sees when times get tough,” he explained. “When things get tough, she postpones a ‘self purchase.’ And there is no greater self purchase for a woman than a dress.”

Right now, his dress sale indicator “is still contracting.”

Mr. Zandi goes even further afield to read the economic barometer. He follows the number of people driving through tunnels and across bridges in New York and the number of airplanes taking off and landing in Orlando, Fla., because it’s a good snapshot of vacation and business travel.

He also tracks the variety of products on grocery store shelves, “in terms of everything from fruits and vegetables to the kind of olives they put on display,” he said. “In tough times you see much less variety, in good times much more variety.”

Mr. Zandi said the hard economic data familiar to most people – such as unemployment figures, gross domestic product measurements and international trade statistics – are still vital for economists. “But these smaller things make a difference and sort of colour my thinking.”

(Paul Waldie, The Globe and Mail)

Harper: 'The worst is behind us'

Prime minister encouraged by new data that suggests economy is in recovery mode

Canadians have reason to breathe a little easier -- the economy fell sharply at the start of the year but talk about another depression appears to have been just talk.

Having been given the best economic news in months, Prime Minister Stephen Harper was quick to take advantage yesterday, saying the Liberals have no reason to push for a federal election.

"I think the worst is behind us, we will have better quarters going forward,'' Harper said in an interview with a Toronto radio station.

"I think that's one of the reasons (Liberal Leader Michael) Ignatieff seems to be pushing so hard with ideas to get the other parties to bring the government down. He would love the opportunity to get in there for a recovery. The country needs an election like a hole in the head,'' Harper added.

The output numbers for the first quarter of 2009 were nothing to boast about. The economy contracted by a massive 5.4 per cent at an annualized rate, the worst in 18 years when there was a 5.9 per cent decline in 1991.

But with the Bank of Canada having projected a 7.3 per cent collapse and some economists saying the decline could be as much as nine per cent, the Statistics Canada data has the feel of a death row reprieve.

And the improving data for the last two months of the quarter -- February and March -- suggests that as Harper noted, the worst is likely over and it happened during the November-January period.

"It is the worst recession since the Great Depression globally, but this is where some of Canada's positives have come back to save us a bit from something nastier,'' said Douglas Porter, deputy chief economist with BMO Capital Markets.

"Make no mistake, it's a very severe downturn. But we've been through these kinds of severe downturns before in the early '80s and early '90s.''

Combined with the revised 3.7 per cent drop in the fourth quarter of 2008, Liberal finance critic John McCallum said the slump still qualifies as among the worst since quarterly data began being kept in 1961.

But he too expressed relief that "there is less panic than there was a while ago . . . and more sense that, 'Yeah, we are going to get out of this."'

McCallum said his party will still press for improvements to unemployment insurance to ensure that more laid-off Canadians qualify for benefits, saying the economy will likely continue to shed jobs for months to come.

(Julian Beltrame, The Canadian Press OTTAWA, June 2, 2009)

Bond surge to spike rates?

Soaring yields have investors wondering if banks will raise interest rates ahead of schedule

Jun 12, 2009 04:30 AM

Economists are dubbing it "the great rate debate."

Soaring interest rates in the bond market in recent weeks have investors wondering whether global central banks could begin raising their trendsetting interest rates ahead of schedule.

Rate hikes were unthinkable only a month or two ago. But a string of "less negative" consumer and employment data, combined with rising stock and commodity prices, serve as harbingers of an economy on the mend. Meanwhile, bond traders are fixating on the threat of inflation as governments issue massive amounts of debt to jump-start growth, while concerns swirl about the security of the United States' prized AAA credit rating.

The confluence of those factors has spurred a sharp run-up in longer-term bond yields in recent weeks, as the market wagers that central banks will be forced to hike interest rates in order to control inflation.

Rising rates would put more strain on consumers by driving up the cost of variable-rate mortgages, lines of credit and other loans, and some economists worry the trend could muck up an economic recovery before it takes root. Already, mortgage rates in Canada and the U.S. have jumped. Typical five-year fixed-rate loans are around 5.85 per cent in Canada, up about 60 basis points in about a week.

Some experts, however, argue that bond yields are due for a correction. The bond market enjoyed a rare strong session yesterday as investors attracted to the higher interest rates bid up bond prices and pushed yields downward. But it's too soon to tell whether the dip in yields marks the beginning of a meaningful pullback.

"The main reason why average Canadians should care about a rise in bond yields is that ultimately, it raises borrowing costs," said Craig Alexander, deputy chief economist at TD Bank Financial Group. "And higher borrowing costs during a period of economic weakness will act as a headwind in terms of how strong the economic recovery is."

Alexander doubts the recent rise in yields is sufficient enough to jeopardize the recovery, but he remains "concerned" because the trend has already resulted in higher longer-term mortgage rates in both Canada and the United States.

Bond market action suggests that various floating-rate loans could be on the rise in the near future. The prevailing sentiment sees the U.S. Federal Reserve increasing its key interest rate by the end of this year, putting more pressure on the Bank of Canada to follow suit.

For his part, governor Mark Carney reiterated plans yesterday to keep Canada's overnight rate at a record low of 0.25 per cent until mid 2010, provided inflation remains tame. Economists, meanwhile, argue the bond market is being too hasty.

"Expectations of a (Fed) rate hike in 2009 may be premature even though the economic outlook is brightening," wrote Benjamin Reitzes of BMO Capital Markets in a report. He noted the U.S. economy continues to shed jobs, while real gross domestic product has yet to bottom out. "With consumers accounting for 70 per cent of the economy, real GDP growth is likely to remain lacklustre through 2010, relative to previous recoveries."

Nonetheless, there were more indications the worst of the crisis may have passed. U.S. retail sales rose in May for the first time in three months, while a separate report showed claims for jobless benefits fell last week.

Economists warn that higher interest rates too soon would hurt consumer spending on both sides of the border, especially on big-ticket items that require financing, such as furniture, appliances, automobiles and homes.

"Markets don't travel in a straight line. So, at some point, I think, there is going to be a bit of a reappraisal," Alexander said. The timing, however, remains sketchy despite yesterday's rally.

U.S. Treasury prices rose yesterday, pulling benchmark yields back from eight-month highs above 4 per cent, as a solid auction of 30-year debt assuaged worries over America's rising budget deficit.

The $11 billion (U.S.) sale was the first reopening of a 30-year issue since the government announced in April that it was moving to monthly sales of long bonds.

The sale appeared to benefit from a steep sell-off in recent days that made bond prices more attractive.

This week has also been the first test of the government's long-term borrowing ability since investors began to question the United States' AAA credit rating last month.

A 10-year auction on Wednesday met with spotty reception and raised some concerns, but the 30-year sale followed up strongly, leaving some fixed income investors heartened.

(RITA TRICHUR, BUSINESS REPORTER)

Mortgage rates rise as bonds grow

HOUSING: Governments boost bond rates to raise money for stimulus packages - and that influences mortgage rates

TORONTO, Mon, June 8, 2009 -- Improved investor confidence and increased government spending may be good for the overall economy, but it can be bad news for home buyers as bond yields rise and push up fixed mortgage rates.

All of Canada's big banks increased the interest rates for their five-year, fixed-rate mortgages by 0.2 percentage points to 5.45% last week.

These increases came as investors pushed up rates on government bonds that influence the the cost of mortgages.

Eric Lascelles, chief economist and rates strategist at TD Securities, said a number of economic factors have played a role in doubling Canadian government bond yields from a low of 1.25% in late 2008 to about 2.5%.

Government bond yields are inversely related to demand: as the economy soured late last year, investors flocked to the safe haven of government debt, pushing yields down. Now, as the economy begins to show signs of improvement, demand for government bonds is shrinking, pushing yields up -- and fixed mortgage rates along with them.

Lascelles added that governments around the world are issuing more and more bonds as they increase borrowing to support massive stimulus projects.

"There's the concern that at some point demand just isn't going to keep up with supply, and you're going to have so many bonds out there and nobody's going to want them," he said.

"If that happens . . . you've basically got to pay a higher return to lure people in to buy those government bonds."

Lascelles described the doubling of bond rates in roughly six months as an "astonishingly concerted push" and said no one should be surprised that fixed mortgage rates are rising, too.

"Historically there has been a pretty good link between government yields and mortgage rates," he said. "A 1.25 (percentage point) increase in the level of government yields suggests an inevitability to mortgage rates going up a little bit, and that's what we've seen."

There are two broad categories of mortgages: fixed-rate mortgages have locked-in rates for the length of their term and are linked to bond market yields, while variable-rate mortgages shift along with the Bank of Canada's overnight lending rate, which was left at its lowest-ever rate of 0.25% on Thursday.

Jim Murphy, president and chief executive of the Canadian Association of Accredited Mortgage Professionals, said mortgage rates have been at historical lows for two months and it isn't surprising to see fixed rates creeping upwards, but consumers shouldn't worry that rates will skyrocket.

"I don't think anybody's predicting that we'll go back to where we were in the early 1980s with double-digit rates in the high teens," he said. "But rates have been very low and as the economy improves and hopefully employment and other situations improve, you're likely to see increases in rates."

While variable-rate mortgages are much cheaper than fixed-rate ones right now -- the Bank of Montreal is offering five-year, variable-rate mortgages for 3.05% compared to 5.45% for a five-year, fixed-rate mortgage -- Murphy said consumers need to assess their risk aversion before they decide which to buy.

"Historically, research shows that you're always better with a variable rate, but most Canadians take fixed rates and the vast majority of those take five-year," he said. "Really, it's a question of your own financial situation and your own peace of mind."

(By KRISTINE OWRAM, THE CANADIAN PRESS)

U.S. housing market woes drag on global economy

Recession will last twice as long as usual and run twice as deep.

The good news from money manager Michael Quigley is that we aren't in another Great Depression because we learned lessons about things such as having deposit insurance, and we'll avoid a painfully slow economic recovery like Japan's in the 1990s due to cultural differences.

On the other hand, Quigley, a senior vice-president with Natcan Investment Management, a portfolio management firm in Canada, told a gathering of National Bank and Altamira clients that worsening housing woes in the United States and a makeover of its financial industry mean a global economic recovery won't come quickly.

"Twenty-five per cent of Americans today have negative equity in their homes; my mortgage exceeds the value of my home," he says. "From the peak in late 2006, the national prices in real estate in the United States were down about 30 per cent. In San Diego, it was minus 54 per cent.

"We're now back to long-term averages, but unemployment is way up and financing is less available, so, at Natcan, we're of the view that the housing story isn't over yet in the U.S."

It also isn't finished yet in Eastern Europe, where half the mortgages were taken out in Swiss francs to get better interest rates.

Another major economic hurdle is the U.S. financial industry.

"When they're finished, their banking system is going to look an awful lot like ours," Quigley says. "Today, five banks in the U.S. control over 70 per cent of deposits."

The industry is sick but gets intravenous feeding from the U.S. dollar, which Quigley doesn't think will collapse, like many people do.

"The deficit in the U.S. and debt are at levels warranted by an emerging market. If the U.S. wasn't the U.S. and owner of the world reserve currency, people would have stopped lending to them a long time ago. But you can afford an awful lot when you're printing the world reserve currency."

That's also why the U.S. can bail out its auto industry, which Quigley thinks will "lose a player at least" as that business is restructured.

The Bank of Canada lowered its overnight lending rate to 0.25 per cent, where it is expected to stay for a year, yet Quigley says that after another 18 to 24 months "we're about to go back to the '70s in inflation."

In the interim, there will be a continuation of stock-market volatility "for several months."

Already, the S&P 500 index in the U.S., which rose or fell more than five per cent in a day only 31 times from 1950 through 2000, did so a whopping 34 times in 2008.

On average, a recession lasts eight months, but Quigley says that "when you have a recession that's accompanied by a banking crisis, it's twice as long and twice as deep."

He says this global recession won't last as long as Japan's did starting in the 1990s, because "in Japan the collective comes ahead of the individual, and the willingness to put up with economic difficulties is enormous. In the U.S., the individual comes over the collective, and the patience to put up with difficult times is much less."

For example, many administrators of pension plans that traditionally invest 40 per cent in bonds and 60 per cent in equities are now saying "that's too painful," and they're going to stay at the 50-50 mix they adopted back when the markets tanked.

Quigley refers to this as "the paradox of prudence," namely paying a high price to play defence.

He points out that 109 years of financial data show that "over the long, long, long run, after inflation, nothing beats equities" as the way to invest.

In 1900, in the U.S., a dollar invested in equities is now worth $582 net of inflation, in bonds is worth $9.90 and in T-bills, $2.80. In Canada, a dollar invested went to $503 in equities net of inflation, $9.70 in bonds and $5.90 in T-bills.

But in the great tradition of economists who are told not to give both a number and a date, Quigley suggests: "If you have money to put in the market, do it in stages, and don't ask us for timing."

Generally, he is more bullish on investing in Canada than the U.S., in the U.S. rather than the rest of the world and in large-cap stocks over small-cap stocks. On the bond front, he says there is a move toward provincial rather than federal or most corporate bonds.

He is very bearish on Japan, but, on the contrary, says "what's happening in China is really, really important, especially for Canada," which is a provider of commodities. The price of copper went up 19 per cent in March, as China doubled its demand for refined copper.

Quigley says a couple of things that could upset the apple cart and derail a recovery are social unrest in emerging Europe and "a return to the panic mode related to banking in the U.S."

Our fingers are crossed.

(By Ray Turchansky, For Canwest News Service;)

With interest rates at zero, Fed looks at going negative

Can U.S. interest rates effectively fall below zero?

Economists and traders expect the Federal Reserve to signal just that today when it makes its first policy announcement since lowering its benchmark target to between zero and 0.25 per cent, a move that left it no room to cut interest rates the conventional way.

Now, there are signs the central bank is about to become much more aggressive in its unorthodox efforts to drive rates effectively below zero.

The Fed has already been intervening in the debt market - or at least promising to do so - as part of its effort to bring down long-term rates. But economists expect even more of the kinds of measures known as quantitative easing as the Fed works to get the lending wheels turning again in the U.S. economy.

The central bank's target rate cannot actually fall below zero. So its measures are aimed at bringing long-term rates to where they would be if short-term rates could go negative, given the traditional spread between the two.

The easing measures will be aimed at forcing market interest rates even lower, which would in turn result in lower rates on everything from mortgages to corporate bonds.

The Fed has hinted in a leaked study that negative rates, while almost unprecedented, may be necessary given the depths of the recession.

"I think they're going to announce another [bond] buying spree," said Rich Yamarone, chief economist at Argus Research in New York. He forecasts that the central bank may spend another $100-billion (U.S.) on Treasuries and $150-billion on other debt.

Economists and investors are also on the lookout for comforting words from the Fed that the central bank has not lost sight of the possibility that throwing around so much money could spark inflation.

"They're just trying to explain why what they're doing makes sense and is not inflationary," said veteran Wall Street economist Ed Yardeni, president of Yardeni Research in New York.

The Fed already has the go-ahead to buy $300-billion of government bonds, more than $1-trillion worth of mortgage-backed securities, and $200-billion of debt issued by the government-sponsored agencies Fannie Mae and Freddie Mac.

So far, it has moved slowly on this front, acquiring less than $70-billion of Treasuries; $60-billion of agency debt; and $381-billion of mortgage-backed securities.

"It seems as though they're trying to carry a big stick and not use it," Mr. Yardeni said.

But that may be about to change.

The Fed has the power to do a lot more. The internal study recently leaked to the media suggested the ideal target interest rate would be minus-5 per cent, based on the current levels of unemployment, inflation and output.

While many discredit that model, known as the Taylor Rule, after the economist who devised the formula, the fact the Fed is talking about it signals that the bank is looking to drive rates still lower.

"Usually where there's smoke there's fire, and they're chatting up the idea of negative interest rates," Mr. Yamarone said.

If the Taylor Rule says the key interest rate ought to be down to minus-5 per cent to revive the economy, "then the Fed's commitment to quantitative easing and expanding its balance sheet can be justified on that basis," Mr. Yardeni said.

"What amount of quantitative easing is equivalent to a minus-5-per-cent interest rate is the exercise they're playing here. It's kind of silly. Other than computer models, it doesn't really mean anything." he said.

The only weapon left in the Fed's arsenal is to ratchet up the purchase of debt securities to drive down yields.

According to internal Fed estimates, the $300-billion of Treasury purchases planned so far would reduce the yield on 10-year Treasury bonds by about 25 basis points.

That would ripple into lower rates on consumer and business loans such as mortgages, whose rates are based on those of long-term government bonds.

So just how much buying would it take to force rates down to a level consistent with what the economy needs? A whopping $3.3-trillion, some economists suggested.

The Bank of Canada will be watching carefully because it too is out of room to cut short-term rates.

The Canadian central bank last week said that it would deploy unconventional measures such as buying bonds if the economy worsens.

(BOYD ERMAN AND BRIAN MILNER, April 29, 2009)