Morneau’s old shop says Canada could need tighter mortgage rules

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Canada may need tougher lending rules to guard against the risks from a higher proportion of borrowers facing deep debts, economists at the C.D. Howe Institute said.

Mortgage debt was at least 500 percent of disposable income in 10.8 percent of households in 2012, up from 3.4 percent of households in 1999, according to a paper published Wednesday by the Toronto-based research group. The combination of low interest rates and a 158 percent jump in home resale prices since 1999 inflated mortgage debt to C$1.2 trillion ($900 million) in 2014, with vulnerable groups among young families and those in expensive markets such as Vancouver and Toronto, the report found.

“There are significant pockets of vulnerability created by the growth in mortgage debt in recent years,” according to Craig Alexander, a C.D. Howe researcher and former chief economist at Toronto Dominion Bank, and Paul Jacobson, president of the Canadian Association for Business Economics. “The majority of Canadians have been responsible in their borrowing, but the sustained low interest rate environment has encouraged a significant minority to take on considerably more mortgage debt relative to after-tax income.”

New Finance Minister Bill Morneau, who was chairman of C.D. Howe before entering politics, has said housing is one of the first briefings he took from his officials. Canada has long faced international warnings about the need to head off a housing crash like those seen in the U.S., the U.K. and Spain, and former Finance Minister Jim Flaherty acted several times to tighten lending rules.

Putting in new restrictions is difficult because those past changes have already slowed credit growth, and because the risks now are in a few segments of the market that make using a “blunt tool” approach counter-productive, the authors said.

Policy makers could set tougher underwriting rules on criteria such as credit scores and debt-service ratios, or raise the interest rate that tests a borrower’s ability to pay up later, Alexander and Jacobson wrote.

One tool to target Vancouver and Toronto would be raising the down payment requirement on more expensive homes, the report said. That echoes a proposal the finance department has been making this year, according to people familiar with those talks.

No matter what happens, the new reality of housing debt will influence Bank of Canada Governor Stephen Poloz when he moves to raise his 0.5 percent policy interest rate. “Every quarter point rise in interest rates in the future will have a much bigger impact on household finances than in the past,” the report said.

“The pace of tightening may need to be very gradual to limit the economic and financial risks,” the authors said. “It should also look to raise interest rates when appropriate to reduce the incentive for households to take on higher debt loads.”
  • An Idea on 2015-12-09 10:43:45 AM

    We don't need tougher rules, we just need to make sure that all the banks follow the same strict underwriting requirements that mortgage brokers are subjected to.

  • K.C. on 2015-12-09 11:29:55 AM

    They should be more concerned about unsecured debt.

  • Brian Matthey on 2015-12-09 11:36:13 AM

    With the existing restrictions and itghtening we have in the lending industry-with refinances restricted and a focus on affordability,we see where the problems exist and it is in unsecured credit,not mortgage debt.I cannot understand where the lobby comes from here in keeping the government focused on mortgage debt.I can see it reflected in higher priced homes in major markets but not the norm across the country.
    Policy makers need to focus on unsecured debt restrictions but that will never happen with a strong billion dollar profit bank lobby, as the goverment has no part in guaranteeing this liability.We already have restrictions when considering a qualified client on mortagge debt plus outside debt,reflected at a higher payment cost than required.I would venture a guess that default statistics would point to outside debt, as a precursor to a problem, than a mortgage payment.Those outside obligations definitely impact a borrower's ability to manage their mortgage and bank's want their client's to have more opportunity to borrower on higher profit yielding debt products.
    The housing crisis in the US was tied to a totally different set of lending practices that we did not practice here.
    The government is pointed in the wrong direction ,but can only put the face of responsibility in an area where they have some input,but it is misguided.Am I missing something here?I am tired of hearing that mortgage debt is the problem when I know current underwriting guidelines are designed around affordability and caution.

  • Jeremy on 2015-12-09 11:48:57 AM

    The issue is not mortgage debt...we have strict qualifying policies in place. The real issue is all the unsecured card facilities and vehicle finances, in my opinion. There are zero qualifying policies in place and all of which you can state your income. Congratulations, you qualify for a credit limit increase...based on what, me making the bare minimum payments for the past 40 months? When will Government wake up to the fact that banks are in the business of keeping Canadians indebted? Place tighter policies and debt service ratios on all credit facilities, cards, loans, LOCs, vehicle finances, etc... combined with some financial literacy and problem solved.

  • Rayanne Soderberg on 2015-12-09 11:56:51 AM

    I find it extremely frustrating that the focus on debt risk seems to be continuously targeting the first time home buyers. It is challenging enough for some to save for a down payment in this economic market without additional restrictions being applied. Why isn't the focus turned to unsecured debt, for example credit cards, where interest rates are anywhere from 10% to 25%. At one time, credit card interest rates would drop when Prime did. Not anymore! I have more clients that struggle with this type of debt. Perchance credit borrowing should be more controlled, with lower approved amounts, capped interest rates or fluctuating rates as Prime changes. Everyone should have the opportunity to buy a home if they want without excessive restrictions limiting their ability to do so.

  • Gord on 2015-12-09 12:00:35 PM

    I would like to have Minister Morneau consider making downpayment requirements relative to the price to sq.ft ratio. This would allow the super heated markets of Toronto and Vancouver to be targeted today but if another market goes nuts next year for the rules to then apply to that new market. It would also continue to enable homeownership for canadians by allowing the lower downpayments to remain on lower price/sq.ft properties.

  • Anon on 2015-12-10 4:30:22 AM

    The regular refinance of unsecured facilities creates new broker business. Min payments are lower at big5 than anytime prior. Borrowers themselves need to manage their additional unsecured debts within affordability. Just because the credit is available that doesn't mean it should be used. Over indebtness?! All us lending pros, have seen this story before.

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