OTTAWA – New mortgage rules to discourage homebuyers from borrowing too much could further dampen a fragile economy, but it’s a risk worth taking, Finance Minister Jim Flaherty said Friday.
Concerned about the continuing heat in the housing market, last week Flaherty intervened on mortgages for the fourth time in less than four years, cutting the maximum amortization period for government insured mortgages to 25 years from 30.
The move is meant to discourage marginal buyers by raising monthly mortgage costs, but a TD Bank analysis this week calculated the measure would also likely have the effect of dampening economic growth by 0.2 percentage points in 2013.
In a conference call from Galway, Ireland, where he was wrapping up a one-week visit, Flaherty said he had not read the TD report, but doesn’t disagree that the economy could be affected.
“I realize it may have some dampening effect on the economy and I realize it may have some dampening effect in the residential real estate market,” he said.
“We are prepared to take that risk, quite frankly, because of the greater risk of the development over time of a housing bubble.”
Flaherty, as well as Bank of Canada governor Mark Carney, have been fretting about the continuing strength of the housing market for several years, particularly since the market has been fuelled by borrowing, rather than rising incomes.
The two policy-makers have long expressed concern that credit continues to grow, although at a slower pace, with household debt to income hitting a record high of 152 per cent in the fourth quarter of 2011.
Meanwhile, analysts believe low interest rates have pushed up house prices to unsustainable levels and that a correction of between 10 and 25 per cent could result.
Flaherty said he expected Canadians will continue to buy homes, but if they now purchase “less house or less condominium, quite frankly, I think that’s a good thing.”
The government believes the move, which also affected home equity loans, could reduce demand by up to five per cent once new rules are in place starting July 9.
The minister said he has heard analysts talk about the market cooling, but noted that last week’s data showed prices on average continuing to rise.
He remains concerned that the condo market in Toronto and other large cities shows no sign of let-up.
“Money is cheap these days, mortgage rates are low, the banks are lending money at low rates, and some people can’t resist that temptation,” he said. “So we are making it more difficult to obtain insured mortgages at low monthly payments.”
The other policy tool available is for the Bank of Canada to push up interest rates, but given the fragile economy, many economists don’t expect any movement until mid-2013 or possibly later.