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Getting Canada's house in order

Flaherty tightens mortgage, lending rules, cools market

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OTTAWA -- Buying a first home or taking out a loan against an existing residence will be more difficult for Canadians under new rules announced Thursday, but Finance Minister Jim Flaherty says it's for their own good.

For the fourth time in as many years, the finance minister moved to tighten the mortgage and lending landscape -- changes that mean up to five per cent of Canadians who might be considering buying a new home will likely no longer qualify.

This time, Flaherty's cutting the maximum amortization period for government-insured homes to 25 years from the current 30 years, and limiting how much homeowners can borrow on the value of their homes to 80 per cent from 85 per cent.

Those are not the only changes the government is making. It will no longer be in the business of insuring homes that are worth more than $1 million -- meaning buyers will need to put up at least a 20 per cent down payment or seek private insurance.

As well, it will insist prospective buyers have the means to afford mortgage payments, property taxes and heating costs. It will do so by setting cost ratios based on household income of 39 per cent for gross debt service and 44 per cent for total debt service.

"It's a question of trying to moderate behaviour and I hope Canadians will reflect before they jump into a market at the high end," Flaherty said. "It will mean that some people will not buy into the market, it will also mean that some people will buy less into the market, they'll buy a less expensive home or less expensive condominium. Good. I consider that desirable."

The changes go into effect July 9.

The most significant change is the reduction to the amortization period, bringing it back to the level where it had stood historically before rising to as high as 40 years during the heady pre-recession days of 2006.

The government said on a $350,000 mortgage with three per cent interest, it will increase monthly payments by $184 over what they would have been with a 30-year amortization. Over the lifetime of the mortgage, the homeowner will save $33,052 in interest payments because the home would have been paid off five years earlier.

Economists generally backed the changes, with some reservations.

CIBC deputy chief economist Benjamin Tal said he wondered about the timing of the announcement, given house prices are already receding. He estimated it could reduce new sales on homes by between three and five per cent. That's not an insignificant hit to a fragile economy that's been riding the coattails of a strong housing and building boom, which supports construction activity and jobs.

"It will not derail the housing market, but it will be felt," Tal said. "(The housing market is) already slowing and if you push too much when we are already slowing, you could fall."

Canadian Real Estate Association president Wayne Moen called the new rules "measured," but also said the government it is courting danger.

"The resale housing market makes a significant contribution to the economy, adding an estimated $20 billion in spinoff spending and over 165,000 jobs in 2012," he said in a statement.

"The impact of measures like those announced today must be closely monitored... "

The latest move is part of a series of initiatives the federal government has undertaken to slow the accumulation of debt by households, which reached a record 152 per cent of income in the fourth quarter of last year. Also on Thursday, the Office of the Superintendent of Financial Institutions published new rules on financial institutions designed to discourage lending to marginal borrowers.

Flaherty conceded the mortgage-rule changes will likely have some impact on Canada's economy, but would not reveal his department's calculations of the anticipated hit to growth.

Economist Jimmy Jean of Desjardins Capital Markets speculated Flaherty and Bank of Canada governor Mark Carney had been working in tandem on the announcement, and the finance minister needed to act because the bank governor couldn't. That suggests historically low interest rates are here to stay for some time, he said.

"There may have been a growing understanding that the Bank of Canada will not be able to hike any time soon," he said.

Flaherty said his decision to act was based on observations of the housing market by both himself and his officials, saying his biggest concern is with the condominium situation in Toronto, and to a lesser degree Vancouver and Montreal.

 

-- The Canadian Press

Republished from the Winnipeg Free Press print edition June 22, 2012 B4

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