May 6, 2019 / 6:05 PM / a year ago

UPDATE 2-Bank of Canada says housing solid, says more mortgage flexibility would boost economy

(Adds quotes from central bank governor)

By Rod Nickel

WINNIPEG, Manitoba, May 6 (Reuters) - Bank of Canada Governor Stephen Poloz on Monday said the housing sector was solid despite a series of challenges and called for a more flexible mortgage market to help make the country’s financial system safer.

The central bank has kept interest rates on hold for six months as it studies reasons for a recent economic slowdown. These include the effects of previous hikes on the housing market, tougher mortgage rules and measures introduced to cut speculation in the major cities of Toronto and Vancouver.

“The market will bottom out and will begin to perform more normally relative to fundamentals and, by the way, the fundamentals are really strong ... population and job growth are really strong,” Poloz told a news conference after making a speech in Winnipeg.

He made no mention of interest rate policy.

Canada’s central bank raised rates five times since July 2017 but has remained on the sidelines in its last four decisions, including on April 24 when it removed wording around the need for future hikes.

The mortgage system was working well but could benefit from an imaginative approach, Poloz suggested in his speech, such as encouraging more people to take out longer fixed-rate mortgages.

He said 45 percent of all mortgage loans had a fixed rate and a five-year term. Just 2 percent of all mortgage loans issued in 2018 were fixed-rate loans with a term of longer than five years.

Longer terms mean consumers face the risk of having to renew at higher rates less often and also can build up more equity in their homes between renewals.

“I can see how longer-term mortgages can contribute to a safer financial system and more stable economy,” he said.

Homeowners cannot buy mortgage insurance for houses that cost more than C$1 million ($746,000) or if they are buying a second property.

Poloz also said it could be helpful to develop a private market for mortgage-backed securities which could be a more flexible source of long-term funding for uninsured mortgages.

“Of course, (there would) be a risk premium relative to non-risky bonds but not a gigantic one,” he told reporters. “That means the company floating that bond can offer a mortgage to you or me in the uninsured space ... at a reasonable price.”

Poloz noted transparency would be important, given that mortgage-backed securities were at the heart of the subprime debacle that preceded the 2008 financial crisis. (Writing by David Ljunggren; editing by Paul Simao and Jonathan Oatis)

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