Canada's Housing Bubble

Feb 08, 2010 Bill Curry and Kevin Carmichael theglobeandmail.com

No plan to tighten mortgage rules

Iqaluit — Finance Minister Jim Flaherty appears to have no immediate plans to tighten Canadian mortgage rules despite the advice of senior bankers concerned about surging home prices.

Mr. Flaherty said he sees no evidence of a housing bubble in Canada.

Easy access to risky mortgages was at the heart of the global financial collapse. Some are calling on Canada to err on the side of caution in ensuring the economy is protected from an American-style wave of mortgage defaults by homeowners.

The Globe and Mail reported Saturday that the heads of the country's six largest banks privately told Bank of Canada governor Mark Carney in November that they fear a potential collapse in house prices and the ensuing potential for economic damage.

The banks reportedly want Ottawa to mandate tighter rules on mortgages so that buyers will need a larger down payment - as much as 10 per cent. They also want Ottawa to reduce the maximum amortization period of a mortgage to 30 years from 35.

But in an interview with journalists following this weekend's G7 finance minister's summit, Mr. Flaherty indicated that he is not concerned that home prices are too high.

"In terms of Canada, we've been watching and monitoring carefully and we continue to do that. There are certain tools available to the government if we choose to use some or all of them. As you know, we did so in 2008, and we're continuing to watch. Right now, there is no compelling evidence of a housing bubble in Canada. There are some signals in the market that are concerning," he said.

Tightening mortgage rules could prove a challenging move politically as it could negatively affect the value of Canadian homes.

Mr. Carney declined to confirm whether the bank chiefs appealed to him to curb mortgage lending.

"We don't comment on private conversations we have," Mr. Carney told reporters on Saturday after the G7 meeting.

The central bank has no immediate worry about a housing bubble. However, Mr. Carney reiterated that households should be cautious about taking on home loans at current rates, which will inevitably rise.

"We've alerted to this issue, the broader issue of household debt," Mr. Carney said. "We want to ensure people manage their affairs recognizing that the current situation with interest rates is extraordinary and extraordinary won't persist."

Both Mr. Carney and Mr. Flaherty have been urging consumers to act cautiously when buying homes for several months now.

"We are in regular, constructive discussions, as we always are with other agencies, including the Department of Finance, and obviously the Minister of Finance and I consult on a very regular basis on a wide variety of issues."