Flaherty threatens to rein in mortgages   December 22, 2009 04:12:00 Les Whittington       Ottawa Bureau        

OTTAWA–First-time homebuyers and others taking advantage of record-low interest rates are likely to face tighter mortgage conditions on Ottawa's orders if housing prices keep booming, Finance Minister Jim Flaherty is warning. In a move with potentially wide repercussions for the economy, he said Ottawa will be forced to intervene if clear evidence of a speculative housing bubble emerges in the months ahead. "If there's evidence of an asset bubble – which there isn't right now, but if there is – we've acted before and we would act again," Flaherty told the Toronto Star on Monday.

 "Mortgage money is really inexpensive right now and there's lots of it available and mortgage interest rates are at historic lows.  "So this concerns me that some Canadians might not pay enough attention to the affordability factor because, inevitably, mortgage interest rates will go up. So I just want to remind Canadians of the importance of looking at how affordable their mortgage rates might be in the future."  Flaherty's warning left economists speculating on its impact – expected and unexpected – for homebuyers, inflation, the economy, the housing market and the construction industry. 

Analysts noted that the finance minister's remarks make him a stand-in for Bank of Canada Governor Mark Carney.  Ordinarily, Carney would raise the central bank's trend-setting interest rate to offset a worrisome burst of inflation. But Carney has been sidelined by his promise to keep the bank's overnight rate at the unusually low rate of 0.25 per cent until next summer. This has kept consumer borrowing rates low and encouraged Canadians to take on more mortgage and consumer debt. 

While admiring Flaherty's vigilance in the face of a possible housing bubble, economists said speaking out is dangerous when consumers are keen to take advantage of bargain-basement borrowing costs. "It might have the opposite effect from what the minister wants," said TD Bank chief economist Don Drummond. "We probably won't see the housing market cool off for the next several months because people will be rushing out" to obtain mortgages before Flaherty acts, he said. 

Economists also said the federal government has to be careful not to do anything to hurt the still-struggling construction industry.  And, in general, Flaherty has to take pains not to knock out the one bright spot – housing – in an economy that is only beginning to crawl out of the worst recession in decades, analysts said.  There's a real danger of going too far to curb the housing market, said CIBC World Markets economist Benjamin Tal. "We have to make sure that we don't overreact" and hurt the recovery, he said. Flaherty explained that the government, if it acts, likely would increase the size of the required down payment to obtain a mortgage from 5 per cent to a higher percentage and reduce the allowable amortization period, which now stands at 35 years. 

Such moves would make it more difficult for Canadians – particularly first-time buyers trying to assemble enough cash for a down payment – to obtain an affordable mortgage and buy a home. That, in turn, would tend to slow the inflationary run-up in housing costs that is worrying policymakers. 

While Canada has been spared the boom-and-bust housing cycle that contributed to the economic meltdown in the United States, the surge in housing prices here in recent months has caught policymakers off guard. Sales of existing homes in Canada shot up 73 per cent in November from a year earlier, the Canadian Real Estate Association says.  Spurred by low interest rates, Canadians went on a buying spree that saw 36,383 homes change hands nationally.

In Ontario and Quebec, home sales hit an all-time record for the month of November.  The average national price in November rose 19 per cent from a year earlier to $337,231, the association said. Flaherty's warning echoes statements by the Bank of Canada, which has said that household debt levels have reached a point where nearly 10 per cent of households would be in risky financial shape if the Bank of Canada rate were to rise to 4.5 per cent by early 2012. 

Private-sector economists have also been raising concerns about a housing bubble fed by low interest rates on long-term mortgages.  While 25-year mortgages used to be common, these days 18 per cent of Canadian mortgages are for terms longer than 25 years, and 10 per cent are amortized over 35 or 40 years, according to a recent Scotiabank report.  "The government doesn't believe it's a problem right now, but there is a potential problem" with housing prices, said BMO Capital Markets economist Doug Porter.  "The fact that the finance minister is talking about it suggests to me that the government has been seriously looking at ways to cool the housing market without necessarily resorting to interest-rate increases."  Consumers likely will have to wait until spring, when seasonal housing sales pick up again, to see if Flaherty decides it's necessary to clamp down, Porter noted. "Over the spring selling season would be the real
test," he said.    

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