Flaherty Tightens Mortgage Rules Amid Bubble Talk

By Alexandre Deslongchamps and Theophilos Argitis

 

Feb. 16 (Bloomberg) -- Canada’s Finance Minister Jim Flaherty today tightened rules in the country’s mortgage industry to ensure homebuyers can afford their purchases when interest rates rise.

Under the changes for government-backed mortgages, which take effect April 19, buyers will have to meet standards for five-year, fixed-rate mortgages even if they opt for variable rates. Limits on refinancing will be stricter and people buying a home that they don’t occupy must make a down payment of 20 percent.

 

Flaherty, who reiterated he doesn’t see a housing bubble in Canada, said the three measures will “moderate” the housing market. Record home prices and sales prompted Stephen Jarislowsky, chairman of Montreal-based investment adviser Jarislowsky Fraser Ltd., to say last week he’s “convinced” there’s a bubble in Canada’s housing market fueled by government measures that encourage consumers to take on debt.

 

Flaherty said the changes will prevent borrowers from building up “unsustainable debt levels” and “help Canadians prepare for higher interest rates in the future.”

It is the second time since taking office in 2006 that Flaherty implements measures to limit the influx of buyers in the market. The Department of Finance in 2008 said the Canada Mortgage and Housing Corp. would limit amortizations to 35 years and offer loan insurance on only 95 percent of the loan value, from 40 years and 100 percent previously.

 

Home-Price Outlook

Former Bank of Canada Governor David Dodge told the Globe and Mail newspaper last week that it’s more likely home prices will fall in coming years than rise, as they are now “high by any conventional measure.”

 

Canadian home prices and resales will grow to records this year boosted by low interest rates, the Canadian Real Estate Association said in a report last week. The group said last month that sales increased in December to a record 46,805 units on a seasonally adjusted basis, up 72 percent from a year ago.

 

“They have basically encouraged people to buy houses based on cheap mortgages,” Jarislowsky, 84, said in a Feb. 11 telephone interview from Montreal. “That has created the opposite effect of what was desirable.”

 

Bank of Canada Governor Mark Carney in December said consumers and banks should be cautious about adding to household debts because a rise in record-low interest rates to “more normal” levels will leave some borrowers unable to pay.

 

Stress Test

Citing a “stress-test” analysis the central bank did of household finances, Carney said that if interest rates rise faster than bond-market yields indicate, almost one in 10 Canadian households could devote at least 40 percent of their income to paying debts, making them “vulnerable.”

 

Canada’s average five-year mortgage rate was 5.39 percent on Feb. 10. In May, it was 5.25 percent, the lowest since 1951, according to Bank of Canada figures. Carney has pledged to keep his main interest rate at a record low 0.25 percent through June unless the inflation outlook shifts.

 

Bank of Canada Adviser David Wolf said in a January speech that it’s “premature” to conclude there’s a bubble in the housing market, and that increasing interest rates to slow it would crimp the recovery as the economy emerges from recession. Central bank policy makers said it would be more effective to tighten mortgage rules.

 

The booming housing market partly reflects the strength of Canada’s financial system, which was named the soundest in the world for two consecutive years by the Geneva-based World Economic Forum.

 

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net