Canada…the prospect of a housing bubble…
By Daniel at 22 December, 2009, 3:01 pm
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TORONTO - Hints by Finance Minister Jim Flaherty that Ottawa may tighten mortgage eligibility rules if it sees evidence of a housing bubble developing sent ripples through the industry Monday, with analysts urging a cautious approach.
“The main risk here is overshooting, over-responding and basically shutting down or slowing down significantly the housing market,” CIBC senior economist Benjamin Tal said in an interview.
“That is a risk they have to take into account, because the housing market is a major, major contributor to overall economic growth and we are still in a very fragile state of the recovery.”
Tal was reacting to reports based on a taped interview with a national news agency to be broadcast next weekend in which Flaherty said the government is worried Canadians may be taking on too much debt because of historically low interest rates and could get into trouble when rates inevitably rise.
In recent weeks, the Bank of Canada has called record household debt the top risk facing the country’s financial system, a warning repeated in Toronto last week by the central bank’s governor, Mark Carney.
The central bank did note that the risk to Canada’s banking system was small, but worried that when interest rates rise to normal levels, up to 10 per cent of households could face difficulties in meeting monthly payment requirements.
Flaherty told a national news agency that if the government sees evidence of excessive demand developing in the housing market then it could take action.
One thing government might do is increase the minimum down payment on residential mortgages from five per cent “to a higher figure,” he said.
The government could also reduce the amortization period from a maximum of 35 years “to something less,” he said.
However, in an interview Monday with The Canadian Press, Flaherty emphasized that the prospect of a housing bubble is “not an immediate concern.”
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