TARA PERKINS, GRANT ROBERTSON AND BILL CURRY
Globe and Mail
Finance Minister Jim Flaherty says he stands ready to intervene in the housing market again, just as a mortgage price war breaks out among Canada’s major banks.
Mr. Flaherty said Tuesday that he’s watching the market closely, although he has no plans to tighten the market again at this point.
His comments came on the same day that the Bank of Canada projected that the debt burden on households will continue to rise, a troubling sign that means stretched consumers are vulnerable to shocks in this climate of heightened economic uncertainty.
Mr. Flaherty said he is in close contact with the big banks, most of whom are now offering 2.99-per-cent fixed-rate mortgages, the lowest ever.
Both the Finance Minister and Bank of Canada Governor Mark Carney have been urging consumers to get a handle on their debts, the bulk of them in mortgages, and not allow low interest rates to entice them into taking on more credit than they can handle.
Mr. Flaherty announced his most recent round of tightening a year ago, when he made a number of changes, including reducing the maximum length of insured mortgages to 30 years from 35 and restricting the amount Canadians could borrow when refinancing.
While low interest rates in Canada, the U.S. and Europe are intended to help fuel economic growth, they are also causing issues for Canadian policy makers, who worry homeowners will take out bigger mortgages than they’ll be able to afford once rates rise.
Some bank executives have recently indicated that they would support Mr. Flaherty taking further steps to tighten the mortgage market, for example by trimming the maximum length of federally insured mortgages to 25 years from 30.
Toronto-Dominion Bank chief executive officer Ed Clark told The Globe and Mail last month that he would not be opposed to the government tightening the mortgage rules further. “If you thought the Canadian economy was strong enough to take another adjustment, then we would say take the 30 [year amortization limit] down to 25 and get this back to where it originally was,” Mr. Clark said.
Bankers also argued that the 2.99 per cent fixed-rate mortgages they have begun to offer, after Bank of Montreal spurred a price war, are not a big problem for consumer debt levels, in part because many Canadians still have variable-rate mortgages that are even lower than that.
“We have been cautioning Canadians for some time that they need to be prepared to have higher interest rates in the future and be aware of the affordability issue that that may create for some Canadians, not to assume that mortgage interest rates will remain low for a long period of time,” Mr. Flaherty said Tuesday. “So we all have to be cautious in our financial planning.”
The ratio of Canadian household debt to personal disposable income hit 152.98 in the third quarter, compared to 150.57 per cent in the prior quarter and 146 per cent in 2010.
Mr. Flaherty added that there are some signs that Canada’s housing market is softening, and he hopes it will continue to moderate.
Mortgage credit, which accounts for 69 per cent of total household credit, “shows no signs of slowing in the near term,” said National Bank Financial analyst Peter Routledge.
“A substantial array of leading and coincident indicators suggests to us that Canadian households will continue to augment their leverage,” he wrote in a note to clients Monday. That, in his opinion, is not a good thing.
“It would be great if everyone just settled down and we saw housing come off 5 or 10 per cent and we kept having an economy that was growing but household credit levelled off, and that would be what I call a soft deleveraging,” he said in an interview. “But we’re not going to have it. And so, I think folks should prepare for – not this year, but somewhere down the line – a more disruptive resolution.”