OTTAWA - Concerns that cracks were beginning to appear in the foundations of Canada's housing market were behind the government's surprise decision to crack down on loose mortgage conditions ushered in less than two years earlier, officials and experts say.
Starting Oct. 15, Canadians will no longer be able to purchase a home with a government-backed mortgage with a 40-year amortization and no down payment.
Instead, mortgages will be limited to 35 years and the government will only insure 95 per cent of the value of the home, meaning buyers will need to come up with at least a five per cent down payment. As well, borrowers must demonstrate that debt servicing costs are no more than 45 per cent of gross income and have a good credit rating.
But while most in the housing sector welcomed the announcement, they also questioned the timing. The Canadian housing sector is cooling after six torrid years of growth.
Bank of Montreal deputy chief economist Douglas Porter said the decision should have been made a year ago, when Canada's housing market was likely exhibiting signs of a bubble as both prices and starts increased by double-digits over the previous year.
"It's better a little late than never and better than ridiculously late," Porter said.
"I think in hindsight, we can attributed a lot of the very strong conditions we saw right across the country in 2007 to the loosening up of rules in the prior year," he explained. "At the time, I was a little concerned that the Canadian housing market just continued to thunder along last year when the fundamentals were starting to move against it."
Liberal MP Garth Turner, who recently authored a book warning about a Canadian housing bust, suggested Canadians could expect to see the value of their homes fall about 15 per cent nationally, and 30 per cent in some hot markets such as Vancouver.
While praising Finance Minister Jim Flaherty for acting, Turner said the minister has also set up the conditions under which some Canadians will try to beat the Oct. 15 deadline.
"This pulls the plug right out of the bubble, but it does it in a way that inflates the bubble another few months," he said.
"If you've been shopping around for a home and you don't have any money for a down payment, you will want to buy now with zero down and a 40-year mortgage. If you're a lender, you've got three months to load up people with debt regardless of what the debt-service ratio is."
Ottawa said the changes were a precautionary measure designed to head off a U.S.-style subprime mortgage crisis, not an indication of underlying problems in the Canadian system.
But officials said concerns had been mounting for months as the government tracked the explosion in the issuing of mortgages longer than 25 years, for years the standard in Canada.
The government had been consulting with lenders, insurers and brokers for the past few months over generous mortgage products, said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals (CAAMP).
"I think they were worried about what was coming out of the U.S. in increases in defaults and foreclosures, and I think they were concerned over their 100 per cent guarantee, wondering, `What is our risk here in a calamity?' " Murphy said.
Flaherty had expressed "concern" over the loose rules several times in the past few months, as had Bank of Canada governor Mark Carney, who told a Parliamentary committee in April "if everyone has a 40-year amortization mortgage, then you just have higher housing prices."
