February 10, 2010 / 10:07 PM / 8 years ago

Ex-central bank chief warns on housing market

OTTAWA (Reuters) - Canadian house prices are close to unsustainable levels and while rapid interest rate hikes may not be appropriate, the country’s housing agency should look carefully at which mortgages it insures, a former Bank of Canada governor said on Wednesday.

“One would have to say that the relation of house prices to Canadians’ income is right at the high end of what one would think would likely be sustainable over time,” David Dodge, central bank chief from 2001-2008, told Canada’s Business News Network channel in an interview.

“That doesn’t say the (central) bank ought to somehow raise interest rates really quickly, but it does say that central mortgage and housing should be very careful about the terms and conditions on which they are giving mortgage insurance,” he said.

BNN aired one segment of its interview with Dodge and will broadcast the rest later on Wednesday.

Dodge was referring to the obligatory mortgage insurance for higher-risk home purchases. The law requires home buyers who can afford less than a 20 percent down payment to obtain insurance from the state-run Canadian Mortgage and Housing Corp (CMHC).

Dodge reprimanded the CMHC during his tenure at the central bank for loosening mortgage insurance rules. Finance Minister Jim Flaherty subsequently tightened standards.

Flaherty said on the weekend there was no compelling evidence of a housing bubble in Canada, but that if necessary CMHC could toughen its down payment and amortization rules for riskier mortgages.

The Bank of Canada has also said it is premature to talk of a bubble in the housing market, but has warned that overall household debt in Canada is historically high in relation to income.

Reporting by Louise Egan; Editing by Jeffrey Hodgson

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