Hints by Finance Minister Jim Flaherty that Ottawa may tighten mortgage eligibility rules if it sees evidence of a housing bubble developing sent ripples through the industry Monday, with analysts urging a cautious approach.
“The main risk here is overshooting, over-responding and basically shutting down or slowing down significantly the housing market,” CIBC senior economist Benjamin Tal said in an interview.
“That is a risk they have to take into account, because the housing market is a major, major contributor to overall economic growth and we are still in a very fragile state of the recovery.”
Tal was reacting to reports based on a taped interview with CTV to be broadcast next weekend in which Flaherty said the government is worried Canadians may be taking on too much debt because of historically low interest rates and could get into trouble when rates inevitably rise.
In recent weeks, the Bank of Canada has called record household debt the top risk facing the country’s financial system, a warning repeated in Toronto last week by the central bank’s governor, Mark Carney.
The central bank did note that the risk to Canada’s banking system was small, but worried that when interest rates rise to normal levels, up to 10 per cent of households could face difficulties in meeting monthly payment requirements.
Flaherty told CTV’s Question Period that if the government sees evidence of excessive demand developing in the housing market then it could take action.
One thing government might do is increase the minimum down payment on residential mortgages from five per cent “to a higher figure,” he said.
The government could also reduce the amortization period from a maximum of 35 years “to something less,” he said.
However, in an interview Monday with The Canadian Press, Flaherty emphasized that the prospect of a housing bubble is “not an immediate concern.”
“If we needed to act, we could do what we’ve done before, in the summer of 2008, and that is to increase the down payment requirements for insured mortgages.”
“I haven’t looked at what we might do in terms of quantum (size of increase),” he said, adding that the government might also shorten the maximum amortization period or take other, unspecified measures to tighten lending requirements.
Gary Siegle, regional manager in Calgary for national mortgage broker Invis, said any stiffening of either down payment or amortization rules would “definitely” have an effect the marketplace.
“It’s just a question of mathematics that there will be people who qualify today who wouldn’t be able to qualify if those changes come into play,” he said.
Siegle noted that with houses in Calgary selling for $350,000 to $400,000, the current five per cent down payment means buyers have to come up with $20,000.
“But if they decide to double it (the minimum down payment) to 10, then you looking at a $30,000-$40,000 down payment that they have to make.”
Siegle said he would like to know the numbers Ottawa has in mind. “It would be really nice if they going to make that move it would be 7 1/2 instead of 10 (per cent) — a kind of middle-of- the-road solution just so that we could get not so dramatic an impact on the marketplace.”
Otherwise, Siegle said it understandable for the government to worry about the effects of rising rates.
“Virtually everyone that I talk to agrees that its not a question if, its a question of when, they’ll start to go up,” he said.
“So when people are taking on mortgages that are $200,000 and $300,000 and $400,000... how are they going to adjust when they come up for renewal?”
“In my career, which spans 30-plus years, I’ve seen rates in the 20 per cent range. I don’t think we’re ever going to go there again, but even if they went to eight, what happens to people if their interest rate doubles?”
The effect of any move to reduce the maximum amortization period would be difficult to judge. The last time that happened, when the period was reduced from 40 years to 35, “was probably not significant because not a lot of people were going to 40 and we hadn’t had it that long,” Siegle said.
Meanwhile, Tal took some comfort from the fact that Flaherty was not specific as to the numbers it might consider.
“The trend (on consumer debt) is not extremely positive but the situation is not alarming,” he said.
“I think they’re concerned about the next 12 months and where we will find ourselves a year from now. So they’re trying to be pre-emptive here and basically start to make sure the inflow of new business is of a higher quality.”
“Therefore I don’t expect this to be a huge increase (that would have)... an unreasonable and unnecessary impact.”
Siegle said that while moves the government is likely to make would dampen the housing market “I wouldn’t say it would kill it.”
“They’re still lots of people who want to get into houses and we’re into a recovery, confidence (is) building in the consumer and rates are still at phenomenally low levels.”
“So I think what will happen is it will take out some folks who aren’t quite ready today. And the government’s view probably is that if they’re not quite ready, maybe they shouldn’t be in the marketplace,” he said.