December 15, 2016 / 3:42 PM / 2 years ago

Canada central bank warns of housing risk, says new rules to help

OTTAWA (Reuters) - The risk of a sharp correction in Canada’s housing market and financial stress on households has increased in the last six months but new mortgage rules are guaranteed to reduce the nation’s vulnerability, the Bank of Canada said on Thursday.

Governor Stephen Poloz said that while tighter regulations will work through the system only gradually, they will improve the quality of household debt by taking the riskiest mortgages off the table.

“They are pretty well guaranteed to work because there are rules about the qualifying criteria,” Poloz told a news conference.

He also said that while the share of borrowers with high mortgage debt continues to grow, the fundamentals of Canada’s priciest markets in Toronto and Vancouver are “very strong.”

“(There are) considerable immigration flows into those markets, there’s considerable job creation in those markets, and therefore income growth. And so there’s undoubtedly a strong demand for housing,” Poloz said.

Canada’s federal government has moved repeatedly to tighten mortgage lending in a bid to prevent Canadians from taking on too much debt to get into the housing market, most recently in October, amid fears soaring prices in Toronto and Vancouver have created a bubble.

While some analysts still fear a U.S.-style crash, others believe the market can achieve a soft landing.

“He is right to express confidence in that these new regulations will have their desired impact. However, if we are hit with a massive economic shock next quarter or tomorrow, it’s not going to help households who are currently highly leveraged if they lose their jobs,” said Robert Both, macro strategist at TD Securities.

In its semi-annual Financial System Review, the central bank said that while the probability of a sharp price correction and nationwide financial stress on households is low, its impact would be severe, given rising debt loads.

The central bank said some 31 percent of recent high-ratio mortgage originations would not have been eligible for mortgage insurance under the new mortgage criteria limiting total and gross debt service ratios. In Toronto, 49 percent would not have qualified for insurance, while in Vancouver 43 percent would not have been eligible - suggesting those hot markets will feel the tightening effect of the new rules most sharply.

A high-ratio mortgage is one in which the borrower has made a down payment of less than 20 percent of a home’s value.

Reporting by Andrea Hopkins and Leah Schnurr; Editing by Andrea Ricci

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