Mortgage Rule Changes Pose Significan​t Threat to Economy

Finance Minister Jim Flaherty is in the hot seat as the market for home sales cools further after months of decline.

The latest data demonstrates sales in November deteriorated, and the Canadian Real Estate Association says sales will continue to fall, not rise, this year and the next.

Flaherty however believes that his actions to curb market growth via a restricting of mortgage insurance rules are just a part of the overall real estate environment, and that Canadians are willfully restraining their exposure to further mortgage debt.

The sterner rules, which took effect in July, included reducing the maximum amortization of insured mortgages to 25-years from 30, which effectively requires borrowers to earn an additional 10% in annual income to qualify for a similar mortgage. This pushed a significant number of first-time home buyers out of the market, or transitioned them to lower priced homes. Throughout this process, Flaherty and the Bank of Canada Governor Mark Carney have been warnings Canadians of the peril of increased debt exposure; the fear is that with interest rates at all-time lows, excessive mortgage debt would become unaffordable to a vast number of borrowers if rates were to increase.

Although economists agree that this strategy appears to be working, a large number of real estate and market professionals, and organizations, argue that the mortgage rule amendments pose a significant threat to the economy.

Chief Economist of the CREA, Gregory Klump, stated in a press release that “[i]nterest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity.”

However, when asked about that statement during a Meech Lake, Québec, press conference, he declared that “the cause and effect is not that simple.” He went on to say “I certainly believe that steps we took to tighten the mortgage insurance rules had some effect. […] The Office of the Superindent of Financial Institutions tightened guidelines as well. And I think there’s and increasing awareness among the Canadian public that excessive debt is unwise in a time of historically low interest rates.”

In my opinion, the current slowdown in the real estate market is attributable primarily, but not exclusively, to the mortgage rule amendments. As Mr. Klump indicated in the CREA press release, current market conditions are primed for strong activity in the housing market. And the fact is that, according to Statistics Canada, Canadians are continuing to borrow heavily, and the maligned and misunderstood concept of the debt-to-income ratio continues to rise: that is, Mr. Flaherty is incorrect in stating that the Canadian public is more aware of the dangers of excessive debt. As I have often declared, the difficulty in artificially adjusting a specific sector of the economy is the inability to understand the long-term consequences of the action. The hope is that the real estate sector will continue to move towards a softer landing. The danger exists however, that Mr. Flaherty has caused damage to the public confidence in the market that will result in a more prolific contracting of sales and decline in prices.

Regardless, if you’re thinking about making a switch, purchasing a home, or refinancing your mortgage, contact your REALTOR® & Mortgage Broker, or feel free to give us a shout, and We’ll be happy to chat.

Best Regards,

Goetz Kopf
REALTOR® and Senior Private Loan Specialist - Residential & Commercial
Century 21 Desert Hills Realty and EQ Lending Corp.


Daman Lehal
Broker/Owner of EQ Lending Corp.

Goetz Kopf

Goetz Kopf

Personal Real Estate Corporation
CENTURY 21 Desert Hills Realty (2010) Ltd.
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