March 22, 2012 / 3:23 PM / in 5 years

Canada government reluctant to tighten mortgage rules

Canada's Finance Minister Jim Flaherty reacts as he receives a firefighter's helmet during a news conference at Fire Station 81 in Stittsville, Ontario March 22, 2012.Chris Wattie

STITTSVILLE, Ontario (Reuters) - Canadian Finance Minister Jim Flaherty signaled on Thursday his reluctance to tighten mortgage rules and choke off the vital contribution the construction business makes to a still-recovering economy, but he said he would do so if necessary.

He said he preferred to let the market correct itself rather than have the government step in and impose new constraints on the industry, a move that some say is necessary to prevent a U.S.-style housing market crash.

Flaherty chided bank executives for suggesting the government impose more restrictions, noting the banks themselves, not the government, is in the business of offering mortgages.

"With respect to tightening up the mortgage insurance market - we've done it three times ... and we watch, we monitor the market, and if we have to tighten it some more, we will," he told reporters in the Ottawa suburb of Stittsville.

That said, he added: "The new housing market produces a lot of jobs in Canada, so there's a balance that needs to be addressed. I'd like the market to correct itself, quite frankly, if it can."

Canada escaped the severe housing downturn that triggered the recent recession in the United States, and the property market's buoyancy has helped underpin the Canadian economy since then.

One of the challenges facing policymakers is the unevenness of the broad Canadian real estate market, with sizzling conditions in Vancouver and Toronto, and relative coolness in other areas.

The price of existing detached bungalows in Vancouver on Canada's West Coast jumped 14.1 percent to C$1.02 million ($1.02 million) in the fourth quarter of 2011 from a year earlier. Yet new housing prices on average across Canada were only up 2.4 percent on the year.

MORE TRANSPARENCY

Canada's banking regulator, trying to curb risks posed by record-high levels of household debt, said this week it wanted lenders to be more transparent about their mortgage businesses.

Flaherty has imposed tougher requirements for government-backed mortgages three times since 2008.

Flaherty said he had noted indications of softening in the Toronto condominium market, which he said was a good sign.

A majority of forecasters surveyed by Reuters in February saw him tightening rules again this year.

Canada's household debt-to-income ratio hit a record high of 151.9 percent last year, largely the result of mortgage borrowing. The ratio dipped slightly in the fourth quarter but at 150.6 percent was not far off the record.

Toronto-Dominion Bank predicted last Friday that the ratio by late next year would reach the 160 percent peak seen in the United States and Britain before their housing crises.

Bank of Montreal pointed out in a release this week that while household debt was rising, net worth was also still rising, now standing at 596 percent of disposable income.

Flaherty said "it was a bit odd" that some banks were pressing him for tighter rules.

"We have bank executives in Canada saying 'You know, really the rules on insured mortgages should be tightened up.' They must forget that they are actually the ones that issue the mortgages - it's their market, it's not my market," he said.

MARCH 29 BUDGET EYED

The federal government still could end up on the losing end of any housing market crash since it insures mortgages through the Canada Mortgage and Housing Corp - C$541 billion worth at the end of the third quarter.

Since 2008, Flaherty has lowered the maximum amortization period for new mortgages to 30 years from 40 years, raised minimum down payments required to qualify for government insurance, and required all borrowers to qualify for a five-year fixed-rate mortgage to get insurance.

If he decided to act again, Flaherty could announce new measures in his March 29 budget.

Flaherty, who has promised to cut spending to eliminate the federal government's budget deficit by the 2015-16 fiscal year, said he would propose moderate cutbacks in the budget.

"This is not an austerity program," he said, adding the focus would be on long-term growth, prosperity, innovation and sustainable social programs.

($1=$1 Canadian)

Additional reporting by David Ljunggren; Editing by Frank McGurty

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