Canada tightens mortgage rules to avoid "bubble"

Wed Jul 9, 2008 4:14pm EDT
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By Randall Palmer

OTTAWA (Reuters) - Canada tightened the rules on government-backed mortgages on Wednesday to try to avoid the sort of housing meltdown that has damaged the U.S. economy.

The Finance Department said it was reducing the maximum amortization period for new government-backed mortgages to 35 years from 40 years.

It will also require a minimum downpayment of 5 percent for such mortgages; previously, government insurance was available for up to 100 percent of the value of a house.

"Today's announcement marks a responsible and measured approach by the government to ensure Canada's housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada," the department said, adding that the measures would take effect on October 15.

The government hastened to emphasize that Canada's housing and mortgage markets were performing much better than in the United States.

Canadian housing prices are in line with economic factors such as low interest rates, rising incomes and a growing population and the demand for residential housing remains buoyant at more than 200,000 housing starts a year, it said.

The percentage of bank mortgages in arrears is also stable at 0.27 percent, the lowest levels experienced since 1990 and well below the highs of 0.65 percent in 1992 and 1997.

"The historically prudent and cautious approach taken by Canadian financial institutions to mortgage lending, combined with a sound supervisory regime, has allowed Canada to maintain strong and secure housing and mortgage markets," it said.   Continued...

<p>A construction worker swings his hammer at a new home development in Ottawa July 9, 2008. REUTERS/Chris Wattie</p>