Brokers are guaranteed to bristle at the suggestion, but a top bank economist is among the first to advocate for an increase in the minimum down payment to 7 per cent instead of 5 – an option with significant implications for first-time and cash-back clients.
"We need to acknowledge that a significant imbalance has developed and it poses a clear and present danger to Canada's medium-term economic outlook,” Craig Alexander, chief economist with TD Bank, said in a report late last week. “It also suggests that further actions to constrain lending growth may be prudent.
"If the overvaluation was fully unwound rapidly, it would be three times the correction in the early 1990s."
While other economists have called for further tightening of the country’s mortgage rules, Alexander is among the first to call for an increase in the minimum down payment to 7 per cent from 5 per cent.
He has also broached the idea of instituting a minimum interest-rate floor for income tests, focused on ensuring borrowers can handle a higher rate environment. Another, more commonly debated option, is shortening the maximum amortization to 25 years from 30.
Brokers, and their associations, have roundly rejected the need for more stringent mortgage rules, despite near-record high levels of household debt relative to income.
That situation became even less sustainable after the Central Bank decided to hold its overnight rate steady last month, further raising concerns that consumers would move to raise their debt levels instead of cutting them.
Alexander is now pegging the overvaluation of Canadian home prices at between 10 and 15 per cent.
He argues that the real culprit in spiking debt levels has been growing home purchases in the current low interest-rate environment.
"The outlook is for mild employment and income growth in the coming year, implying that households will gradually become more lever-aged over time," he said.