Ottawa tightens mortgage rules again
9:00 AM, E.T. | June 21, 2012
In its fourth crackdown in four years on a still-hot housing market, Ottawa tightened conditions for both borrowers and lenders on Thursday to put the brakes on home buying and deflate a possible housing bubble before it pops.
Mindful of the U.S. housing crisis, where consumers ratcheted up debt only to be sideswiped by rising interest rates, financial crisis and recession, policymakers said their new rules and guidelines would make it harder for home buyers and homeowners to take on massive debt.
"I have been listening to the market, and quite frankly I don't like what I hear ... Some calming of the market is desirable," Finance Minister Jim Flaherty told a news conference in Ottawa.
"In Toronto in particular what I've observed and heard about from developers is continuous building without restriction because of persistent demand. This concerns me because it's distorting the market."
Canada's bank regulator, the Office of the Superintendent of Financial Institutions, released its own guidelines to lenders, urging them to perform due diligence on the borrower's ability to repay a debt and manage risks effectively.
Policymakers want tighter mortgage rules to do the work that interest rates cannot, given the inability or unwillingness of central banks to raise borrowing costs in the face of global economic problems.
The mortgage rule changes will cut the maximum length for government-backed insured mortgages to 25 years from 30 years and lower the maximum amount Canadians can borrow against their homes to 80 percent from 85 percent, among other measures.
The amortization period for mortgages had ballooned to 40 years amid deregulation in the last decade. But the government trimmed it to 35 years in 2008, 30 years in 2011 and now 25 years to discourage home buyers from taking on too much debt.
The change means borrowers will have to make higher monthly payments and will build equity in their homes more quickly. But it will also cut the ability of consumers to buy higher-priced homes, a move experts believe will help cool the bidding wars that have dominated some markets.
Canada does not have the subprime market that helped doom the U.S. to mortgage defaults and foreclosures, nor do lenders typically repackage and resell mortgages the way U.S. lenders did before the U.S. housing bust in 2009.
The bulk of mortgage lending still goes through the country’s big six national banks, whose relatively conservative lending and investment practices helped them emerge from the global financial crisis mostly unscathed.
Economists and policymakers have nevertheless been ringing alarm bells about rising home prices amid bidding wars, galloping condo development and soaring household indebtedness, fearing Canada is simply coming late to a housing crisis.
Policymakers have struggled to find a way to slow the housing market without derailing still-tepid growth in other sectors of the economy. Analysts believe higher interest rates, an obvious answer, have been put off until mid-2013 at the earliest given global financial malaise.
"At long last, the Canadian government is coming to the realization that the ball was in its camp all along and that further tightening of mortgage rules is necessary to reduce Canadian households' vulnerability to future interest rate hikes," said Louis Gagnon, a finance professor at Queen's University.
The changes take effect on July 9, a relatively quick implementation period that may bring forward some housing activity, but should not create the volatile bulge that followed more gradual changes to mortgage rules in 2011.
"Households have little chance to pull activity forward to get in front of the changes. We nevertheless do expect weaker sales in the months ahead," David Tulk, chief Canada macro strategist at TD Securities wrote in a research note.
Flaherty said the government will also set a maximum gross debt-service ratio of 39 percent for households and only allow government-backed insured mortgages on homes with a purchase price of less than $1 million.
The cap on payments on mortgage debt and other home-related expenses is designed to prevent new buyers from taking on a mortgage where they might be unable to keep up with payments when interest rates rise or their circumstances change.
The ratio of household debt to personal disposable income has risen to 152 percent, a level similar to that seen in the United States before the end to the housing boom there left many homeowners with less equity in their homes than the homes were worth, or in foreclosure.
The Bank of Canada has identified household indebtedness as the most important risk to financial stability in Canada. But it cannot raise interest rates to cool borrowing because global financial crises are threatening Canada's economic growth.
"The move (by Flaherty) probably reflects the realization that interest rates will remain unchanged for longer than previously expected, and is designed to prevent a resurgence in activity, akin to the one we saw in mid-2011," Benjamin Tal, economist at CIBC World Markets said in a note.