diBy Tim Iacono

Given what’s happened in global financial markets over the last few years, it’s kind of amazing that there are still any housing bubbles around anymore, however, with home prices now moving lower in both China and Australia, it’s increasingly likely that in another year or so that claim will no longer be made as the toughest housing bubble of them all – the one in Canada – is getting poked with a pin by the nation’s finance minister as detailed in the report in the Globe & Mail.

Jim Flaherty is singling out Toronto’s overheated condo market as one of the main reasons Ottawa is tightening the rules for insured mortgages.

The average price of a Toronto condo – $334,952 – was up in the first quarter, as were total condo sales. In spite of anecdotal evidence of some cooling since, Canada’s Finance Minister decided it was time to step in.

On Thursday, Mr. Flaherty announced a tightening of mortgage rules that he hopes will discourage Canadians from taking on too much debt and prevent a real-estate-driven hit to the broader Canadian economy.

Those steps, which take effect on July 9, include dropping the maximum amortization period for insured mortgages to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per centfrom 85 per cent.

There will also be a new rule to ensure a loan is not too big in comparison to household income. Finally, insured mortgages will be available only for homes with a purchase price lower than $1-million – an effort to ensure taxpayers do not back mortgages for the wealthy.

Apparently consumer debt has risen dramatically in Canada in recent years, much of it being the 2005-era U.S. style home equity “tapping”, something that only works so long as home prices remain elevated which, so far, they have done north of the border.

But, when home prices begin to fall, then it’s a different story as I’d bet Canadians will soon find out.

Ironically (or disappointingly, as the case may be), these new regulations only take lending practices back to what they were around 2005, perhaps an ominous sign for what is to come as loosening lending standards in recent years may make the end result more unpleasant than it might otherwise be.

About The Author

Tim Iacono, a retired software engineer living in Bozeman, Montana, is the founder of Iacono Research. (EconMatters author archive here.)


The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.

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