Morneau tightens the screws

Morneau tightens the screws

Federal government announces new measures intended to reduce housing market risk

TORONTO — Ottawa has announced a number of measures aimed at curbing risk in the country’s housing markets, including closing a tax loophole and tightening mortgage insurance rules to prevent borrowers from taking on too much debt.

Finance Minister Bill Morneau said Monday that the government will make changes related to the principal residence tax exemption.

The exemption allows homeowners to avoid paying capital gains tax on the sale of a home as long they were living in it.

That exemption will now be available only to Canadian residents, Morneau said, and families will only be allowed to designate one home as their primary residence.

The federal government will also beef up rules surrounding stress tests for insured mortgages to make sure that borrowers don’t take on more debt than they can handle if interest rates go up or their income drops.

“Low interest rates have gradually changed the way both lenders and borrowers view debt and indebtedness in this country,” Morneau said during a news conference.

“As these attitudes and behaviours have changed, some households began carrying high debt loads and pockets of risk have begun to emerge.”

Starting Oct. 17, all insured mortgages will have to undergo a stress test to determine if the borrower will still be able to make his or her mortgage payments if interest rates rise.

Previously, these stress tests weren’t required for fixed-rate mortgages longer than five years.

Another policy change coming into effect on Nov. 30 will require mortgage loans that the banks insure with portfolio insurance to meet eligibility criteria that previously only applied to highly leveraged insured mortgages.

The changes come as concerns mount that housing costs in Toronto and Vancouver have become increasingly unaffordable for many Canadians while foreign investors purchase homes and turn them around for a quick profit.

Many middle-class families looking to buy homes have found themselves priced out of the market, Morneau said, and in some cases that has led them to take on high levels of debt.

“Affordability is an issue that concerns many middle-class families, particularly here in Ontario and in B.C.’s Lower Mainland,” Morneau said.

“It’s a real issue and we don’t take it lightly. Federal government policy alone cannot control house prices certainly not directly. But it does have a role in ensuring that housing markets are stable and functioning efficiently.”

A report released last week by Swiss bank UBS singled out Vancouver as being at greatest risk of a housing bubble in the world.

Chris Ballard, Ontario’s housing minister, called the federal efforts “an interesting move.”

“We’re very concerned about affordable housing in Ontario,” he said at the Ontario legislature shortly after Morneau’s announcement.

“I would like to see some solutions brought to the table sooner rather than later, but at the same time what we realized early on is Ontario really doesn’t have, and the federal government really doesn’t have, the data that we need to make the best decisions,” he added.

“There are all sorts of questions that just have never been asked about foreign buyers.”

Ottawa will also be launching a consultation with industry members this fall to discuss the possibility of introducing lender risk sharing — a policy that would see the banks shoulder more of the risk for mortgage loans defaults, for instance by way of an insurance deductible.