2012 Federal Budget Silent on Mortgage Rules

Despite expectations from different sectors that the government will step in to tighten the mortgage rules driving the lending and housing markets, there was no mention of mortgage reforms in the budget. On this subject Canada’s Minister of Finance, Jim Flaherty, told reporters he would like the market to “correct itself”. The government did, however, promise to introduce legislation that would increase oversight of the Canada Mortgage and Housing Corporation – CMHC – “to ensure its commercial activities are managed in a manner that promotes the stability of the financial system,” but provided few details on its planned changes.

It seems that the mortgage market is becoming a sensitive issue no one wants to touch but everyone would like someone else to act on it.

Low mortgage rates are encouraging Canadians to borrow at worrying levels, and contributing to a hot housing market. The longer mortgage rates stay low, the more debt Canadians will pile on, and the bigger the eventual shock will be when mortgage rates rise.  However, there are strong reasons to keep rates low:  the U.S. Federal Reserve is committed to keeping its benchmark rate steady through to 2014 and hiking up rates north of the border would send the loonie soaring and likely slam Canada’s already weakened exports.

Big banks like Bank of Montreal and TD Bank have expressed concern that they can’t help but offer incredibly low rates to borrowers who want to buy a house they can’t really afford or they will lose out to the competition. They are calling on the government to tighten the mortgage rules for everybody and are asking for a cap on government mortgage insurance or to shorten the current maximum mortgage amortization period from 30 to 25 years. Flaherty replies by stating “Bank executives must forget that they are actually the ones that issue the mortgages–it’s their market, it’s not my market”.

And with no action being taken by any of the involved parties, the ratio of Canadian household debt to personal disposable income is nearing peak levels seen in the U.S. and the U.K. before their respective housing crashes.   In the end, Flaherty may just have to be the one to step in to regulate conditions and control market trends.

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