Ottawa advised to tighten mortgage rules
February 10, 2010
By Julian Beltrame
OTTAWA — The federal government should avoid major surgery and make only minor adjustments to deal with fears of overheating in Canada’s housing market, a number of leading economists said Wednesday.
Federal Finance Minister Jim Flaherty and the Bank of Canada have expressed concern that Canadians may be assuming too much debt in home purchases, debt that could rebound on them when interest rates rise.
But some solutions being floated in advance of Flaherty’s March 4 budget — doubling the minimum down payment to 10 per cent, or reducing the maximum amortization period from 35 to 30 years — could do more harm than good, the economists said.
“We want some sort of micro-surgery, not (taking) a pickaxe to the problem,” said Avery Shenfeld, chief economist with CIBC World Markets.
Bank of Nova Scotia economist Derek Holt said such radical surgery could cause home prices to crash and shake confidence in the consumer sector, a key driver of the fragile economic recovery.
Interviews with economists at four of Canada’s big banks showed some disparity of views as to the size of the problem, but general agreement that there is good reason for concern.
Most see home prices in Canada as being 10 to 15 per cent too high, largely because construction of new homes ground to a halt during the recession, decreasing available supply, and because of record-low interest rates, which are luring many new entrants into the market.
The Canadian Real Estate Association said this week it expects home prices to gain another five per cent to a record average of $337,500 this year. Sales will also hit record levels this year before tailing off next year, the association said.
It is unclear whether Flaherty is contemplating measures to cool prices and activity. Last weekend, the minister told reporters he was closely watching prices, but did not believe Canada had a housing bubble as yet.
But if one were to develop it could have wider repercussions on the economic recovery, as occurred in the United States, the economists said.
The best approach now is to take baby steps that would help moderate prices and activity and create a so-called soft landing.
One measure, according to TD Bank deputy chief economist Craig Alexander, would be to tighten the “income test” banks use to assess whether a prospective homeowner can meet monthly mortgage payments.
Already, banks build in a cushion in handing out floating mortgages by judging credit worthiness based on the borrower’s ability to make payments on the three-year rate, not the variable rate — about a two percentage point difference. Alexander said that could be increased to the still higher five-year posted rate.
A variation would be for banks to judge ability to meet payments not just on the mortgage but on all outstanding debts of a prospective homebuyer.
Yet another idea would be to deny government-backed insurance on mortgages for investment properties, thereby dampening speculation.
Economists believe such measures could help deflate any housing bubble without bursting it.
“It’s not in the interest of either buyers or lenders to have boom-bust cycles,” said the TD’s Alexander.
“That’s the lesson from the U.S. experience. If you have the wrong incentives and you don’t have regulations, you end up in a place you don’t want to be.”
Bank of Montreal economist Douglas Porter said if Ottawa chooses to raise the down payment requirement, it should do so modestly, perhaps to six or seven per cent.
Porter said, however, that he didn’t think reducing the amortization period to 30 years would be dramatic enough to cause a major disruption in the market.
Economists point out that home affordability is expected to tighten this summer even if Flaherty does not change the rules.
The introduction of the harmonized sales tax starting July 1 in Ontario and British Columbia — two of the hottest home markets — is expected to add a couple of thousand dollars to home purchases in those provinces.
And Bank of Canada governor Mark Carney is widely expected to start raising interest rates as early as July.
The Bank of Canada is expected to raise its benchmark interest rate in the Summer of 2010. The only question remains is how much and how fast. That is only 6 months away and this will have a major impact on all lending rates including mortgages, lines of credit and maybe even credit cards. Now is the time to reexamine all your debts and financial situation.
Having a prudent financial mortgage expert working on your behalf is the best defense against rising interest costs. The decision you make over the next couple of months regarding your mortgage and other debts will have a major impact on your financial future