Canada toughens borrowing rules to cool housing market

UPDATE 4-Canada toughens borrowing rules to cool housing market | Reuters

 

Thu Jun 21, 2012

UPDATE 4-Canada toughens borrowing rules to cool housing market

By Louise Egan and Randall Palmer

* Government says wants to calm housing market

* Rules shorten mortgages, limit borrowing against home

* Analysts, central bank applaud, say sales will likely cool


 

OTTAWA, June 21 (Reuters) - In its fourth crackdown in four years on a still-hot housing market, Canada tightened conditions for both borrowers and lenders on Thursday to put the brakes on home buying and deflate a possible housing bubble before it pops.

Mindful of the U.S. housing crisis, where consumers ratcheted up debt only to be sideswiped by rising interest rates, financial crisis and recession, Canadian policymakers said their new rules and guidelines would make it harder for home buyers and homeowners to take on massive debt.

Canada's bank regulator, the Office of the Superintendent of Financial Institutions, released its own guidelines to lenders, urging them to perform due diligence on the borrower's ability to repay debt and manage risks effectively.

Canadian policymakers want tighter mortgage rules to do the work that interest rates cannot, given the inability or unwillingness of central banks to raise borrowing costs in the face of global economic problems.

Bank of Canada Governor Mark Carney, who has called household indebtedness the biggest risk to financial stability in Canada, applauded the measures.
 

Canada does not have the subprime market that helped doom the United States to mortgage defaults and foreclosures, nor do lenders typically repackage and resell mortgages the way U.S. lenders did before the U.S. housing bust in 2009.

The bulk of mortgage lending still goes through Canada's big six national banks, whose relatively conservative lending and investment practices helped them emerge from the global financial crisis fairly unscathed.

Economists and policymakers have nevertheless been ringing alarm bells about rising home prices amid bidding wars, galloping condo development and soaring household indebtedness, fearing Canada is simply coming late to a housing crisis.

Policymakers have struggled to find a way to slow the housing market without derailing still-tepid growth in other sectors of the economy. Analysts believe higher interest rates, an obvious answer, have been put off until mid-2013 at the earliest given global financial malaise.

 

The changes take effect on July 9, a relatively quick implementation period that may bring forward some housing activity, but should not create the volatile bulge that followed more gradual changes to mortgage rules in 2011.

Flaherty said the government will also set a maximum gross debt-service ratio of 39 percent of gross household income and only allow government-backed insured mortgages on homes with a purchase price of less than C$1 million ($980,000).

The ratio of household debt to personal disposable income has risen in Canada to 152 percent, a level similar to that seen in the United States before the end to the housing boom there left many homeowners with less equity in their homes than the homes were worth, or in foreclosure.