Costs are driving new home prices up across Canada. CREDIT: Ric Ernst, The Province

Despite yesterday’s quarter-point drop in the Bank of Canada’s interest rate, homeowners should not expect longer-term mortgage rates to decline. In fact, long-term rates may increase, observers say.

The major chartered banks dropped prime-lending rates to 3.75 per cent effective today, which will reduce variable and short-term mortgage rates.

Longer-term mortgage rates, however, are based on the bond market, not the Bank of Canada.

Bond yields were up slightly this week, which suggests a rate increase for longer-term mortgages by the end of the week or early next week, said Karl Madsen, regional sales manager for national mortgage broker Invis.

“It’s hard to predict where interest rates are going, but if you’re out shopping for a house, I’d recommend getting pre-approval for a mortgage so the rate is guaranteed for 120 days,” Madsen said. “It costs you nothing and it gives you four months to shop for a house without having to worry about an increase in the mortgage rate.”

Variable-rate mortgages will remain lower than fixed-rate mortgages for the foreseeable future so homebuyers who don’t mind fluctuating rates will benefit, he said.

For people who prefer the stability of a locked-in term, the rates are as low as they’ve been for a generation.

In a widely expected move, the Bank of Canada dropped its overnight interest rate to two per cent — a level rarely seen in more than 40 years.

But the central bank also hinted this could be as low as interest rates are going to go. And that means borrowing costs could start to rise late this year or early in 2005, analysts said.

“Make no mistake about it — this cut is the last,” said Marc Levesque, senior economist with TD Bank Financial Group.

Analysts were struck by the bank’s optimistic statement that risks to its outlook “now appear balanced.”

That suggests the central bank is in neutral and, since it foresees healthy growth this year and in 2005, the logical next move is towards higher rates.

“The bank definitely seems to have drawn a line in the sand and effectively said they now think their work is done — unless there is some unforeseen surprise,” said Doug Porter, senior economist with BMO Nesbitt Burns.

The last time the Bank of Canada’s key lending rate touched two per cent was in January, 2002. It lingered there for three months as central banks around the world reacted to the terrorist attacks of Sept. 11, 2001.

Before that, the rate hadn’t dipped so low since September, 1960.

Builders across the country raised their prices for new housing in February by 0.4 per cent from January, Statistics Canada said yesterday.

Higher costs for labour and building materials were behind the increase, the agency said. Across Canada, new-house prices rose in 15 of 21 cities. Vancouver showed an increase of 0.2 per cent and Victoria was up by a slight 0.1 per cent.

Comparing year-over-year prices in February, Victoria posted the largest increase at 10.1 per cent — the fifth consecutive month it has posted Canada‘s largest 12-month increase.

© The Vancouver Province 2004