December 11, 2015 / 3:16 PM / 5 years ago

Canadian government tightens housing rules to cool boom

OTTAWA (Reuters) - Canada’s newly elected Liberal government said on Friday it would force people who want to buy more expensive homes to provide a bigger down payment, in a bid to cool parts of a hot housing market some fear is developing into a bubble.

Canada's Finance Minister Bill Morneau speaks during a news conference on Parliament Hill in Ottawa, Canada, December 11, 2015. REUTERS/Chris Wattie

Finance Minister Bill Morneau said he was acting to contain risks in Toronto and Vancouver, where prices have continued to surge even as an oil price slump and a mild recession in the first half of the year slowed activity elsewhere.

“We are not fearing anything in particular,” he said. “We’re just trying to make sure that we prudently look at areas of the market that present some potential risks.”

The new measures would require buyers who need government-insured mortgages to make down payments of up to 7.5 percent on homes worth C$500,000 ($365,000) to C$1 million, up from the current 5 percent.

Economists said the down payment and other changes would have limited impact. The new measures will affect only 1 percent of new insured mortgages nationally, 4 percent in the Toronto area and 6 percent in the Vancouver area, a government spokesman said.

And they will not touch homes worth more than C$1 million, since 20 percent down payments are already required. The average price of a detached home in downtown Toronto in November was C$1.02 million, though condos were C$415,316.

“This will have a minor impact on the banks but a bigger impact on unconventional lenders,” said Colin Cieszynski, chief market strategist at CMC Markets.

CIBC economist Nick Exarhos noted that while the intent is not to cool slowing markets, it could still hit Calgary, headquarters for many companies hit by weak oil prices.

With more prudent lending requirements, Canada escaped the U.S. housing crash of 2007 that triggered the global financial crisis. But low borrowing costs have fueled a post-crisis housing boom and sent household debt as a percentage of income to record levels.

The Bank of Canada, which cut interest rates twice this year to counter the effect of cheap oil, has acknowledged the risks of rising household debt. But it has insisted macroprudential measures such as Morneau’s would be a more effective tool to deal with the housing issue than tighter monetary policy.

Morneau’s move gives the Bank of Canada more latitude to keep interest rates low for longer, said Royal Bank of Canada senior economist Robert Hogue.

Additional reporting by David Ljunggren in Ottawa and John Tilak and Andrea Hopkins in Toronto; Editing by James Dalgleish and Diane Craft

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