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The federal government took direct aim at Canada’s hot housing market on Thursday. Finance Minister Jim Flaherty unveiled a number of new rules on insurance-backed mortgages that economists and commentators say will tame what many are now calling a housing bubble.
Many commentators say it’s about time the federal government took action on soaring home values.
Louis Gagnon, associate professor of finance at Queen's University, tells BNN that the move was “long overdue”.
“Canadians keep borrowing in spite of the signals and in spite of the warnings from the Bank of Canada,” he says. “It’s high time these rules were implemented.”
The government tabled four new rules: it will reduce the maximum amortization period to 25 years from 30; lower the maximum amount of equity homeowners can take out of their homes when they refinance to 80 percent from 85 percent; limit taxpayer-backed mortgage insurance to homes that sell for less than $1 million; and limit the gross debt service ratio of a mortgage to 39 percent and the maximum total debt service ratio to 44 percent.
“This is a very prudent step…it reduces the risk to the Canadian financial system,” Craig Alexander, economist at TD, tells BNN.
But was the move too much and will it bring the housing market screeching to a halt when the rules kick in next month?
“They are absolutely essential in a very low interest rate environment because the low interest rates are so enticing that they cannot be overcome with mere speeches telling Canadians not to borrow," Ian Lee, associate professor at Carleton University, tells BNN
Lee says he’s not worried about a housing market crash as Canadians have shown in previous housing downturns that they will continue to pay their mortgages.
Other commentators say the move to tame the housing market through tighter regulations is better than pushing for the Bank of Canada to raise interest rates.
“We have a problem with too much debt and raising interest rates is a blunt instrument if you want to control borrowing on the part of households,” John Johnston, chief strategist at Davis Rea, tells BNN. “[Tighter regulations] attacks the problem at its heart rather than attacking the rest of the economy.”
But Johnston warns the move by Flaherty may be too late.
“My concern is that we eased conditions on the way up and we’re tightening conditions at the peak, and may be that’s too much -- you get a hiccup from abroad and maybe we have a real problem on our hands,” he says.
The move comes as Canadian households currently hold a record debt-to-income ratio of 152 percent. Mark Carney, the governor of the Bank of Canada, says high debt levels are the biggest threat to the Canadian economy.
And while the government says the new mortgage rules will only impact about 5 percent of the market, it will likely be first-time buyers that are hit the most.
“Who this is going to effect is that person who is just on the edge of getting into the market or those moving up in the market,” Don Campbell, president of the Real Estate Investment Network, tells BNN. “The majority of investors don’t use CMHC insurance…nor do foreign buyers because they’re not buying under CMHC rules.”
CHANGES MAKING THINGS WORSE
But, at least one economist warns that the recent move could do more than just slow the housing market.
“Already the debt level of households is already extremely high and the increase in house prices has already been seen and we’re already seeing some kind of slowdown in the housing market and credit accumulation,” Charles St. Arnaud, an economist at Nomura, tells BNN. “The risk is that we are we putting more dynamic to the downside.”