24 October 2010 ~ 0 Comments

Ottawa ponders further tightening of mortgage rules


Garry Marr and Paul Vieira, Financial Post

The federal government is once again looking at tightening rules in the Canadian mortgage market, according to a source close to the situation.

Finance officials are set to meet in Ottawa on Monday with some of the country’s leading economists for pre-budget discussions and the subject of whether to tighten housing regulations may come up.

Much of the discussion about changing the mortgage rules seems to stem from comments made by the Bank of Canada governor who last week warned that consumer borrowing could not continue at its present clip.

“Canadian household balance sheets are becoming increasingly stretched,” said Mark Carney, who issued a warning to legislators about taking steps to contain the growth of personal debt. “Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks.”

A spokesman for the Finance Minister said toughening existing rules on mortgage eligibility is not on the agenda on Monday when Jim Flaherty meets with economists. The spokesman added the government has already addressed the real estate sector in initiatives introduced earlier this year.

But Craig Alexander, chief economist with TD Bank Financial Group, said while he hasn’t heard specific talk about changes to mortgage rules he could see it happening if the market heated up again.

“There is growing concern about the growth of debt. It’s now 146% of personal disposable income and the bulk of that is secured debt — mortgage debt or home equity lines of credit,” said Mr. Alexander, adding the worry is that if long-term rates remain low or go even lower it could once again ignite the housing market.

He said the easiest way for the government to tighten rules would be to tweak the income test requirement. Instead of consumers qualifying for government-back mortgages based on the rate on their contracts — the case for terms five years or longer — they would be tested on the posted rate, which is considerably higher and requires more income.

In April, the government adjusted mortgage rules to force consumers to qualify based on posted rates but left in a loophole that allowed the discounted rate for terms longer than five years. It also increased the minimum down payment for investment properties to 20% from 5%.

Those moves came after the government imposed requirements in 2007 that forced consumers to have a minimum of 5% down on a home and lowered amortization periods to a maximum of 35 years from 40 years.

Mr. Alexander said if the government went further and imposed rules that further lower amortizations, or worse, increased the minimum down payment, it could seriously impact the housing market.

A real estate source indicated that as recently as eight weeks ago he had heard Ottawa was considering tightening mortgage rules but the recent slide in the market has it rethinking that. The latest statistics show average prices are now falling, while sales are down about 20% from a year ago.

Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada, said housing activity is slowing, but all indications are the market will be okay and prices relatively stable under the present rules.

“I would be surprised [if there were further changes] because I think you want to keep the housing market rolling,” said Mr. Polzler.

The government has to balance the impact any changes in mortgage rules might have on the overall economy. According to July GDP data, the home resale market fell significantly for a third consecutive month, and led to an 8% decrease in the output of real estate agents and brokers. The output of real estate sector is now at about two-thirds of the level recorded at the beginning of 2010 when housing was hot, Statistics Canada data indicates.

Leave a Reply