November 18, 2016 / 7:32 PM / 2 years ago

Canada should mull higher home down payments -housing agency chief

OTTAWA, Nov 18 (Reuters) - Canada should look at the possibility of raising minimum down payments for homes to address concerns about high levels of debt in an era of low interest rates, the head of the country’s housing agency said on Friday.

The Canadian government recently tightened mortgage rules. And late last year it increased down payments on the portion of a home price above C$500,000 ($369,986.68) for buyers who need government-insured mortgages.

In a speech at an event held by the Bank of England, the chief executive of the Canada Mortgage and Housing Corporation called that increase on down payments an “initial step.”

The CMHC’s objective of supporting housing affordability demands that the agency “explore a potential future path to higher minimum down payments,” Evan Siddall said.

In prepared remarks that highlighted rising consumer debt in Canada, Siddall also said it was also worth exploring the merits of a loan-to-income limit as a way to mitigate the effect of low interest rates on housing demand.

CMHC, which is responsible for insuring the bulk of Canadian mortgages issued by banks and other big lenders, advises the government on policy, along with other institutions.

The recent changes to mortgage rules made by the government will moderate demand and limit price increases, making houses more affordable, Siddall said.

Policymakers have said prudent bank lending standards rule out a repeat in Canada of anything like the U.S. housing meltdown in 2008. But years of low interest rates have bolstered the market and there are growing fears prices are overheated.

The Bank of Canada has flagged high household debt as a vulnerability for the financial system, warning the rapid pace of price increases in Toronto and Vancouver is unlikely to continue.

CMHC said last month there was strong evidence that many of the country’s housing markets are overvalued.

Siddall reiterated that on Friday, while also pointing to the record high level of consumer debt that was at 167.6 percent of income in the second quarter.

The combination of elevated home prices and household debt are “begging for a policy response,” Siddall said, adding that such conditions are commonly followed by economic contractions.

“The conditions that we now observe in Canada concern us,” Siddall said. “Increased household borrowing could be jeopardizing our economic future.”

Still, he said raising interest rates is too blunt an instrument for addressing specific vulnerabilities, a view that is similar to the Bank of Canada’s.

$1 = 1.3514 Canadian dollars Reporting by Leah Schnurr; Editing by Tom Brown

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