Canada tightens mortgage, tax rules in latest bid to cool housing

Mon Oct 3, 2016 4:23pm EDT
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By Ethan Lou

TORONTO (Reuters) - The Canadian government said on Monday it will tighten mortgage rules and close a tax loophole on home sales, seeking to rein in both foreign investors and indebted consumers in its latest move to cool a market that some have called a housing bubble.

While Finance Minister Bill Morneau said he believes the overall housing market is "sound," the new measures would impact the foreign investors many have blamed for high housing prices as well as buyers and lenders who have driven Canada's massive mortgage debt.

Analysts said the measures will likely send overseas buyers to other markets while raising mortgage costs at home, potentially dousing a market that is already losing steam.

"They didn't create the bubble, but they are making it worse," said Hilliard MacBeth, an Edmonton-based portfolio manager at RichardsonGMP who predicts a real estate crash.

"The government constantly does this ... the lending is too loose on the way up and too tight on the way down."

Soaring prices in Canada's two most expensive markets, Toronto and Vancouver, have raised concerns about a bubble and speculation by foreigners, mostly from mainland China. Home prices in Toronto and Vancouver have more than doubled in the last 11 years.

The change to the capital gains tax on principal residences was clearly aimed at foreign speculative demand, said Emanuella Enenajor, senior Canada and U.S. economist at Bank of America-Merrill Lynch in New York.

"But Canada has very limited not very reliable information about foreign presence, so calibrating policy that targets foreign demand with blurred vision, there's a lot of risk. It can be too strong, too aggressive, or not do enough," Enenajor said.   Continued...

An excavator digs at a condominium construction site on what used to be a neighborhood of single family homes in Toronto, Ontario, Canada October 3, 2016. REUTERS/Chris Helgren