Canada tightens mortgage rules, says no bubble yet

Tue Feb 16, 2010 5:40pm EST
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By Ka Yan Ng

TORONTO (Reuters) - Canada will bring in new mortgage rules to cool the country's red-hot housing sector, citing the need to prevent a property price bubble even as it gives assurances the market is stable.

Finance Minister Jim Flaherty said on Tuesday he was concerned that home buyers, tempted by record low interest rates, may overextend themselves and that he also wanted to discourage the "tendency by some to use their homes as an ATM machine".

"There is no compelling evidence of a housing bubble, but we're taking proactive, prudent, measured and cautious steps today to help prevent a housing bubble," Flaherty told a news conference in Ottawa.

While the U.S. housing market has struggled to recover, sales and prices of existing homes in Canada soared last year, boosted by the Bank of Canada's near-zero interest rates and the resulting low-cost mortgages.

For December, sales were up 72 percent from the year before when activity dropped to the lowest level in a decade. The average price of a home was at C$337,410 ($323,190) in December, up 19 percent year-over-year.

And many in the industry had forecast further strength in 2010.

Flaherty announced three changes to the rules for government-backed insured mortgages, designed to prevent the kind of problems that caused the U.S. housing market to collapse, triggering the global financial crisis.

The rule changes, which come into force on April 19, will require borrowers have the resources to qualify for a five-year fixed-rate mortgage even if they decide on a lower-cost variable rate mortgage.   Continued...

<p>Canada's Minister of Finance Jim Flaherty listens to a question during a news conference in Ottawa February 16, 2010. REUTERS/Blair Gable</p>