Tighter Mortgage Lending Rules Could Hurt Canadian Economy

By: Daniel Rattanamahattana on November 22, 2012

 

Earlier this year Finance Minister Jim Flaherty tightened mortgage lending rules for Canadians, which lowered the mortgage amortization period from 30 years to 25 years.  The government justified the new rules as necessary to deflate high household debt across Canada.  Canadian families now owe $1.63 on every $1 that is earned, with much of that debt connected to mortgages.  However, the Canadian Association of Accredited Mortgage Professionals (CAAMP) has warned the new changes go too far, and economists suggest reduced performance in Canada’s housing sector could lead to a downward spiral for the entire Canadian economy.

The rules were meant to tighten access to mortgages and reduce the number of Canadians accumulating more debt than they can manage.  However, CAAMP Chief Economist Will Dunning says the rules are doing more harm to the housing market than the government may have initially forecasted.  Since the rules were implemented in July, Dunning says home resale activity has declined by 8 percent compared to last year. 

“The new mortgage insurance rules are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy,” Dunning wrote in a CAAMP report.

This decline in resale activity means fewer Canadians are qualifying for a mortgage under the new lending rules.  First time homebuyers have been particularly shutout of the market, which Dunning worries will further decrease the volume of home sales.  As fewer Canadians qualify for mortgages to sustain demand, home prices will diminish in an effort to boost sales activity.  However, reduced home prices lower value and confidence in Canada’s housing sector.  Due to the interconnections between Canada’s housing sector and economic growth, reduced confidence in housing can result in less confidence in the Canadian economy.

Dunning suggests that home prices are influenced by the job market because stable employment provides Canadians with options to either rent property or buy property.  If the market is providing sustainable well-paying jobs, the demand for housing will rise because more Canadians can afford to buy.  As a result economists are paying close attention to employment numbers over the next few months because those numbers will be an indicator of how housing is expected to perform in 2013.

If employment appears to be slowing down, expectations are that the housing market will continue to lose momentum.  Dunning says since economic growth is heavily reliant by a strong housing sector, this reduced value could “wreak substantial economic damage”.

 

Comments