The government’s hand may have been forced by the Bank of Canada monetary policy update this week. Governor Stephen Poloz lowered the country’s overnight interest rate to 0.5 percent, the second time this year that the central bank reduced the overnight rate by 25 basis points.
Banks and mortgage brokers will likely reduce the rates on their own loans to consumers, which will stimulate more demand for housing, increase the volume of sales, and consequently continue to raise home prices. In Toronto and Vancouver, the average price of a single detached home, traditionally the most popular type of home, cleared $1 million earlier this year.
These types of homes are approaching unaffordable rates, and have already pushed first time buyers or Canadians with inexperienced credit scores out of the hunt. As a result, Ottawa is considering new measures to protect Canadians.
According to the Financial Post’s Garry Marr, members of the Finance Department are recommending an increase to the minimum required down payment to purchase a home. The current minimum threshold is five percent of the home’s value, which is the only way for buyers to qualify for mortgage insurance backed by the Canada Mortgage and Housing Corporation.
The other option on the table is to increase the minimum down payment for homes beyond a certain high price level, a not so subtle admission that prices in Toronto and Vancouver are getting out of control. The CMHC refuses to insure homes worth more than $1 million, and increasing the minimum down payment for these homes can protect people from borrowing more than they can afford to manage.
Ottawa intervened in the mortgage market several times in the past, notably to lower the rate of amortization from 40 years down to 30, and then again to 25. The government has been reluctant to intervene in the market again, but the rapid rise in prices coupled with ongoing low mortgage rates is only further fueling the overheated market.
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