Mark Carney, the Governor of the Bank of Canada gave a speech in Canada outlining the reasons behind the recent change in mortgage rules. Implemented by the Minister of Finance Jim Flaherty, the changes come into effect in July. The idea is to create long term stability in Canada’s housing market and prevent excessive borrowing. Carney framed it as taming the mortgage market.
Carney noted his concerns about what the super low interest rates are doing to the economy in general. People are becoming accustomed to debt-fuelled spending and that is not healthy. Lenders and borrowers have altered their behaviours because of these low rates.
He then went on to talk about the financial situation in Europe which may well affect the central bank here in Canada. Since raising interest rates with a potential problem looming would be unwise, it fell on the government to do some regulation in the industry. This will help control the debt situation in Canada, largely fueled by real estate loans. Carney noted he was consulted by the government before the new rules were created.
According to Carney, Europe’s instability could put an unwanted crimp in Canada’s economy, perhaps even more so in the more fragile market in the United States. His team also noted that if unemployment rises that some Canadian homeowners could find themselves overwhelmed with their debt commitments. Carney also put in a warning about the condo market in Toronto, which currently is booming.
Also in his speech, Carney noted that Canada’s economic 2012 forecast may see a revision when his report comes out in mid July. Most economists already had this figured out. The first quarter showed an increase of 1.9 percent, which was lower than the 2.5 percent predicted by Carney this past April. Carney had predicted a 2.4 percent growth increase in 2012, which is not likely to happen now. This is all affected by the financial situations in the United States and particularly the European Union.
A few investors hinted that the global economic situation may force the Bank of Canada to reduce its rates even further, by according to Carney that is not going to happen. Canada’s economy is still strong. Then again, there was a hint of reconsideration in his statements about rate hikes/decreases being affected by how things in the rest of the world played out.
Statistics Canada released a report this past Thursday noting that housing sales have already started to slow down. April saw a decrease both in the number of sales and in pricing. A few economists are thinking that the new mortgage rules may slow the market down too much, thus effecting one of the strongest parts of the recovered Canadian economy. Carney disagreed with that notion.
The Minister of Finance Jim Flaherty released the details of the new rules at the end of June. It changes the maximum period of amortization from the current thirty years to twenty five years. It also limits the amount of equity a homeowner can pull out of their properties to refinance, from 85 to 80 percent. Government backed mortgages will only be available for homes prices less than $1 million. The total debt service ratio will now be at 44 percent, with the gross debt service ratio coming in at 39 percent. Target date for the new rules is July 9th.