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Flaherty talks more about Canadian Real Estate & Mortgage Markets

Yesterday we looked at reports from Ottawa that Finance Minister Jim Flaherty was looking at tightening up mortgage regulations, specifically increasing the minimum down payments and reducing the maximum amortization periods (currently 5% and 35 years).

This morning Bloomberg has more from Flaherty (but still no specific proposals):

Flaherty, in an interview today, said recent price increases for homes in Canada are due to a “confluence” of factors including low interest rates, an improving economic outlook and a stabilizing job market.

“We always watch the housing market to make sure that we do not see the development of an asset bubble,” Flaherty, 59, said during an interview in his office in Ottawa. “There would have to be clear evidence of an asset bubble in residential real estate in Canada, which there is not right now,” for the government to take steps.

The lowest mortgage rates since the Korean War have helped fuel a 67 percent jump in existing home sales in November from their January low, with the average price up 19 percent from a year ago to C$337,231 ($317,335), according to data from the Canadian Real Estate Association.

Bank of Canada policy makers Dec. 10 cautioned that rising debt levels will make Canadian households more vulnerable when interest rates rise. Households have kept adding debt this year while other countries such as the U.S. and U.K. have seen reductions in debt-to-income ratios, leaving more Canadians at risk when interest rates rise, the Bank of Canada’s report said.

…

“There are very low interest rates of course, the Canadian economy is showing signs of recovering, although it has not yet recovered, the job market has stabilized, so there are some encouraging signs for Canadians,” Flaherty said.

Canada last year tightened mortgages rules. Home loans insured by the government through the Canada Mortgage and Housing Corporation were limited to a maximum term of 35 years and required a minimum down payment of 5 percent, up from zero.

Were the government to eventually consider new measures for the housing market, they would likely be similar to the changes implemented in 2008, Flaherty said today.

“What we have done before can be done again,” Flaherty said.

In other news out of Ottawa, Prime Minister Stephen Harper says that “the government is "optimistic that 2010 is going to be a year of recovery," he also cautioned that Canada’s record-breaking low interest rates will come to an end.”

CIBC World Markets just released a report stating that Canadians need to manage increasing debt levels, but that there are several factors that should ‘buffer Canadian homeowners from being saddled” with loans more expensive than they can afford:

These include the fact that some mortgage-holders have substantial home equity, even if home prices drop. Some also have high debt payments that could be reduced, because the high payments are meant to accelerate the paying down of the mortgage principal.

The report said that history suggests many Canadians will jump from variable to fixed mortgages in time to avoid the full brunt of a variable mortgage rate shock. Also, Canadian financial institutions generally issue variable rates only to customers who quality for a three-year fixed-term rate, which is well above current variable rates. So, while variable rates will likely rise, most will be able to absorb the rate increase and remain within a qualification threshold.

"The result is that [the] number of Canadians truly at risk could be substantially less than the Bank of Canada’s estimate," said Avery Shenfield, CIBC World Markets chief economist.

If you have any questions about how the current economic conditions relate to your real estate investment holdings, email me or call 519.772.4376 to set up a complimentary consultation. 

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3. What is the Bank of Canada doing with mortgage rates?
4. Ottawa hints at tighter mortgage regulations
5. Canadian Real Estate Market Growth Based on Demand