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Canadians continue to spend money on mortgages, but they are keeping a wary eye on the economy and proceeding cautiously.

A new report from CIBC World Markets says household credit in Canada is rising at an annual rate of more than 10 per cent, with both consumer and mortgage credit expanding at a similar rate.

"Total residential mortgage outstanding rose by a strong 13 per cent during 2007 – notably stronger than the 10 per cent rate seen in 2006," says the report. "This is very different than the situation south of the border where the pace of growth in mortgage outstanding has slowed significantly."

However, with both housing starts and resale activity forecast to drop by about five per cent this year, CIBC World Markets says it's unlikely the mortgage market will continue at this pace.

"While the prime rate is falling and will continue to fall in the near term, the credit crunch means that the discounts on variable-rate mortgages are not as wide as they were for most of 2007, and the spread on the five-year fixed rate over the five-year government bond rate is at an all-time high," says the report. "Along with the cyclical slowing in the economy, this suggests that overall growth in mortgage outstanding in 2008 will be roughly eight to nine per cent."

The report notes that the wide gap in the performance of Canada's western economies and the rest of the country is reflected in the mortgage market. The value of outstanding mortgages in Ontario is 5.3 per cent and in Quebec it's 3.1 per cent, while in Alberta, it's rising by more than 20 per cent.

Canada's housing market has continued to boom while the U.S. faltered, due to the country's healthy economy and the fact that the subprime mortgage market in Canada is very small. But some people believe the problems that are hitting U.S. homeowners could come here.

Liberal MP Garth Turner just published a new book called Greater Fool: The Troubled Future of Real Estate. He says it's a myth that Canadian lenders are more conservative than their U.S. counterparts, pointing to the introduction of 40-year amortization mortgages and the availability of mortgages with five per cent down. Turner says that home buyers, particularly first-timers, are over-extending themselves and there's no guarantee that their homes will rise in value.

However, Canada's mortgage arrears rate is still extremely low – 0.26 per cent. "Note that this trend is very different than the situation in the U.S., where delinquency and foreclosure rates have risen notably in recent months," says the CIBC World Markets report. "There is little doubt that low interest rates played a role here, but even more important was the fact that the labour market has been relatively healthy in recent years. We believe that the next six to 12 months will see some upward trend in arrears. But since we do not expect a significant deterioration in overall labour market conditions in Canada, the upward pressure on this rate will be limited at best."

Canada Mortgage and Housing Corp.'s annual consumer mortgage survey says that 78 per cent of Canadians who recently bought a home plan to pay off their mortgage as quickly as they can, and many have already started.

"This study confirms that Canadians remain fundamentally cautious when it comes to their mortgage debt," says CMHC's Pierre Serré. "The fact that new homeowners are working to pay down principal early and are accelerating payments is a good indication that this responsible behaviour will continue throughout the life of their mortgage."

One-third of the purchasers surveyed have made a lump sum payment, while another third have shortened their original amortization period. More than half said they were making weekly or biweekly payments, and 84 per cent of these payments are being made on an accelerated basis.

The CMHC survey shows two distinct mortgage consumer groups, based on their attitudes towards debt – those who are fiscally conservative and those who are comfortable with debt. On the conservative side, 40 per cent of survey respondents strongly disagreed that they would take longer to pay off their mortgage if it improved their monthly cash flow. However, 25 per cent of respondents strongly agreed with the statement, showing some comfort with being in debt.

The survey also showed that despite the problems in the U.S., 88 per cent of Canadian mortgage holders are confident that they can handle their debt, and 70 per cent believe that real estate is as good an investment now as it was two years ago.

The survey of 1,404 active mortgage consumers was conducted last fall.

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