Canada has again moved to tighten its mortgage rules for the second time in less than a year, citing the need to prevent the kind of housing market problems that led other countries into financial crisis.
The new rules, designed to ensure Canadians don't take on more debt than they can handle, took aim at mortgage amortization, refinancing and the use of lines of credit secured by homes.
Many U.S. homeowners borrowed against the rising value of their houses and refinanced mortgages to fund spending in the run-up to the global recession.
Finance Minister Jim Flaherty, who warned that Canadian interest rates were bound to go up, said the new measures would "have some moderating effect on the (housing) market."
"The main reason we're taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues that have happened in some other countries, that have been very damaging to families," Flaherty said.
Canada's housing market avoided the meltdowns seen in countries like the United States, Britain and Ireland during the global recession. Resale prices dropped in 2008, then rebounded sharply the following year thanks to low mortgage rates that made it easier for customers to borrow money.
This sparked a rise in borrowing that has alarmed some policymakers. Recent data from Statistics Canada shows Canadian household debt has risen to a record C$6.1 trillion, or 148 percent of disposable income.
Flaherty said the insurance had become "particularly risky" because some Canadians were using the lines of credit to buy things like boats, cars and big screen televisions.
The opposition New Democratic Party said the government should be focusing on job creation and not scolding Canadians on how to spend their money.
"Household debt is a result of the high cost of living, not big-screen TV purchases... Try paying your housing and heating bills on a precarious part-time job," the party said in a release.
SMALL IMPACT, BUT BIG MESSAGE
The rules are the latest in a line of baby steps the government has taken to cool the housing sector, while repeatedly saying it sees no signs of a housing bubble.
The last round of changes, announced in February, included requirements that borrowers have the resources to qualify for a five-year fixed-rate mortgage even if they decide on a lower-cost variable rate mortgage.
The previous changes, combined with higher interest rates, helped cool the housing markets from its red-hot pace of a year ago. Many observers now describe the market as balanced.
Industry reaction was supportive. The Canadian Association of Accredited Mortgage Professionals said there was a "fine line" between the health of the real estate market and to make sure Canadians do not overextend themselves.
"The actual impact will likely be smaller than the message," said Phil Soper, president and chief executive of Royal LePage Real Estate Services. He added that the amortization period change was a prudent tweak and not an overhaul.
"The real key here is that the first-time buyer wasn't impacted negatively by this announcement. Refinancing impacts people who are in homes and it directly targets people's indebtedness, but it shouldn't take real estate transactions off the table."
The measures announced to limit the maximum amortization periods will probably affect a "minority" of mortgage applicants, and a 30-year limit is "sustainable," said Gerald Soloway, chief executive at mortgage lender Home Capital Group .
"The effect won't be that great. I think it amounts to about C$100 (a month) on a C$300,000 mortgage," said Soloway.
For Canadian banks, the new rules may add to a slowing of personal loan growth, but analysts said a slowdown had already been expected due to expectations of higher interest rates, more prudent lending practices on the part of banks, and the possibility of tighter mortgage standards.
"I don't expect the new regulations to have a massive change on the trajectory of loans from the banks, largely because I think the banks knew this was coming," said Craig Fehr, a Canadian bank analyst at Edward Jones in St. Louis.
BANK OF CANADA WATCHING
Flaherty said the timing of Monday's announcement was not linked to Tuesday's interest rate announcement from the Bank of Canada, which has sternly warned about the risks of growing public indebtedness.
While the Bank of Canada could also cool the housing market by raising interest rates, many analysts think it is reluctant to move too soon ahead of the U.S. Federal Reserve because this could send the Canadian dollar to fresh multiyear highs.
Market operators overwhelmingly expect the Bank of Canada to keep rates unchanged Tuesday, although many think it will have raised them at least once by the end of May.
"There had been some talk of the Bank of Canada raising rates earlier in order to slow the growth rate of household debt, but we think that today's announcement will help to quash that idea," said TD Securities analyst David Tulk.
The sentiment was echoed by BMO Capital Markets economist Michael Gregory, who said the reduced amortization "should soften the demand for homes/mortgages below what they otherwise would have been."
The adjustments to the mortgage insurance guarantee framework will come into force on March 18. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18.
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