Tightening mortgage rules aimed at cooling Canada’s housing market “may have come too late” to prevent a hard landing.
The warning comes from Moody’s Investor’s Service, following last week’s announcement from Finance Minister Jim Flaherty that rules on government-back mortgages would be tightened to reduce the risk of a housing market crash.
“The government’s moves may have come too late, owing to the buildup in consumer debt that has already occurred,” Moody’s said in a research note Monday.
The changes included reducing the maximum amortization on a government-backed loan to 25 years, from 30 years and reducing the amount consumers can borrow against their home to 80 per cent, down from 85 per cent.
Flaherty had previous said the government would step in “if necessary” but Moody’s is concerned the government waited too long, making a soft landing difficult to engineer.
“Previous rule changes had some effect in countering the stimulus provided by historically low interest rates but failed to stop Canadian household leverage from increasing,” Moody’s analysts William Burn and Andriy Stepanyants said in the report.
In addition, slowing growth in household disposable income will be a challenge for consumers trying to pay down their debts, they said.
The changes would immediately cool home sales by requiring increased monthly payments, argue the analysts, and Canadian banks would benefit as borrowers keep more equity in their homes. The new rules would also lead to stronger debt service, creating an “equity buffer” and reducing the risk of unsecured credit exposure.
However, low interest rates encouraging borrowing were still a risk, according to the report. A Bank of Canada report estimates that a 325 bp rise in rates over the next three years would nearly double the number of households with debt service ratios of 40 per cent or more, from 11.5 per cent in 2011 to 20 per cent in mid-2015.