Tougher mortgage rules coming from the feds

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No housing crash is predicted

Reuters Feb 21, 2012 – 11:53 AM ET | By Louise Egan
Feb 29, 2012 - 9:57:11 AM

C anada housing prices won’t crash: poll

OTTAWA — Canada’s government will make it tougher for many home buyers to get mortgages this year as it grapples with an overheated property market, according to analysts in a Reuters poll, who also ruled out the prospect that prices could suddenly crash.

Ten of 14 economists and strategists surveyed last week in Reuters’ first poll on the Canadian housing sector answered “yes” when asked if they thought Ottawa would tighten mortgage rules within the next 12 months.

They expect home prices to climb just 0.1% in the year to December 2012, and the same in 2013. That is down from a 0.9% year-on-year increase in December 2011.

If Finance Minister Jim Flaherty tightens requirements for government-backed insured mortgages it would be his fourth intervention in the real estate market since 2008.

Flaherty could raise the minimum down payment to buy a home from the current 5% or reduce the maximum amortization period from 30 years.

Any move would likely come before the prime spring real estate season, analysts said. “Sometime between now and the next budget,” said Benoit Durocher, senior economist at Desjardins in Montreal, on the timing of such a move.

The budget is expected in late March.

The poll respondents see the housing market as moderately overvalued, particularly in Toronto and Vancouver.

“There is some genuine concern that the housing market and households have been overstretched,” said Mazen Issa, economist at TD Securities.

“But in the absence of several triggers for a housing market decline, which are not likely to be forthcoming until at least the middle of next year, the underlying theme is of gradual moderation,” he said.

Possible triggers would be a rise in mortgage rates or a sharp rise in unemployment.

Canada’s robust housing market helped pull the economy out of the 2008 recession. Prices dipped briefly during the downturn, but quickly resumed the climb that characterized the previous decade.

But that effervescence is now a headache for policymakers, as historically low interest rates tempt more and more people to take out mortgages for increasingly unaffordable homes.

Household debt levels are approaching those in the United States before the 2008-09 housing meltdown there. Canada’s debt-to-income ratio hit a record 153% last year and is expected to rise.

The Bank of Canada, which has fanned the flames by holding its benchmark lending rate at 1% for an unprecedented 17 months, has made it clear that rates are likely to stay unchanged for at least this year. Of the nine forecasters who answered a question on how far prices would fall before stabilizing, the median decline was 5%, with four predicting price stabilizing beyond 2013.

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