May 25, 2013


Title: Has the Canadian government too far?

Sub-title: Industry leader suggests that tightening mortgage rules are stunting job growth and will cause further hits to housing starts.


Canada is widely regarded as having done a good job overseeing its financial system.  Residential real estate has avoided the crash that hit the United States and the World Economic Forum rated its banks as the world’s best. Part of the credit goes to the Harper Government, which on four separate occasions tightened lending standards. Now a major industry figure is hinting they may have gone too far.


“There is a concern with balance,” says Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals (CAAMP). “We thought things were slowing prior to last series of changes announced and that trend continued. Now we are increasingly concerned about the effect that the larger down-payments and reduced loan amortization periods now required are having on first time buyers.”


A recent CAAMP report cites housing starts, which fell from an average of 205,000 units in 2011 and 2012 to a seasonally adjusted annual rate of 175,000 by April 2013. The group projects that the pace could slow to 150,000 units by the end of 2014. Existing home sales have also slowed and are now running at a 9 percent lower pace than they were at, during the year prior to the last round of mortgage policy changes which were announced in July 2012.


Housing is huge industry in Canada and a major contributor to the economy and jobs. If the construction slowdown plays out as CAAMP projects, the organization says that “employment will be 150,000 jobs lower than it would otherwise have been.”


Murphy is right to be concerned. CAAMP represents 12,000 mortgage professionals across the country, whose businesses have taken a hit. According to the report, mortgage credit growth, which peaked in 2008 at about 13 percent, will slip to a pace of about 4.5 to 5.0 percent for the rest of 2013. Total outstanding mortgage credit, which hit $1.16 trillion at the end of 2012 is expected to rise to only $1.25 trillion by the end of 2014.


That said, with Canadian household indebtedness now hitting record levels, near US peaks prior to the crash there, action was clearly needed. Outgoing Bank of Canada governor Mark Carney for example repeatedly warned about the dangers of over-borrowing. With Canada’s central bank suggesting that rising interest rates could endanger the economy, tighter lending standards proved to be a compromise solution.


Furthermore not everyone is as worried as Murphy. “The market appears to have stabilized at lower levels,” wrote Craig Wright and Robert Hogue, economists at RBC, in its Housing Trends and Affordability Report, released this week, noting that “much of the decline in resales took place in the months following the implementation of the latest changes to government-insured mortgage insurance rules.”


How this will all play out is anyone’s guess. However with all the bubbles and crashes that the world has seen in recent years, settling for “slower growth” in mortgage credit may not be such a bad thing.




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