Canada to clamp down on mortgages, eyes housing

Canada will tighten its mortgage rules and reduce support for lines of credit secured by homes in a bid to prevent the housing market from overheating, Finance Minister Jim Flaherty said on Monday. Flaherty, who said interest rates were bound to go up, said the new measures would "have some moderating effect on the (housing) market," which has avoided the meltdowns seen in other countries during the global recession.
"The main reason we're taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues that have happened in some other countries, that have been very damaging to families," Flaherty said. Canadian housing prices dipped during the recession, but have been rising since, thanks to low interest rates that have made it easier for customers to borrow money.
The Canadian government has repeatedly said it sees no signs of a housing bubble. "We're taking these steps in any event now because of our concern about higher interest rates down the road," Flaherty told a news conference, expressing concern that some people were "borrowing to the max" at low rates. Flaherty said timing of Monday's announcement was not linked to Tuesday's interest rate announcement from the Bank of Canada, which has warned repeatedly about the risks of growing public indebtedness.
While the Bank of Canada could also cool the housing market by raising interest rates, many analysts think it is reluctant to move too soon ahead of the US Federal Reserve because this could send the Canadian dollar to fresh multiyear highs. Market operators overwhelmingly expect the Bank of Canada to keep rates unchanged on Tuesday, although many think it will have raised them at least once by the end of May.
"There had been some talk of the Bank of Canada raising rates earlier in order to slow the growth rate of household debt, but we think that today's announcement will help to quash that idea," said TD Securities analyst David Tulk. Under the new rules Ottawa will: Reduce the maximum amortisation period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 percent; Lower the maximum amount people can borrow in refinancing their mortgages to 85 percent from 90 percent of the value of their homes; Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit (HELOCs).