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Are Mortgage Rules Really to Blame for the Cooling Housing Market?

30 October 2012

If we ever hear from the Ministry of Finance in Canada, it’s usually Jim Flaherty, the Finance Minister, that we hear from. But, Michael Horgan, the Deputy Minister of Finance has recently spoken to business students at Carleton University in Ottawa, during which he shed some light on the Canada mortgage rules that went into effect across Canada this summer. And while Mr. Flaherty’s been getting all the credit for cooling the market with his new mortgage rules, Mr. Horgan isn’t quite so sure that these rules are to blame for what’s happening in Canada.

“There’s some evidence that the housing market, particularly in some markets, is cooling and slowing at the moment,” Mr. Horgan said. “We read a lot of press commentary that’s saying it’s because of the government’s changes to mortgage insurance rules. I think it’s actually too early to make the direct link.”

But is that correct?

The Canadian Real Estate Association has been coming out with figures ever since August that sales are down – in September alone it was by 15.1 per cent when compared with September of 2011. The first half of October has already seen sales down in some of the hottest Canadian markets, and it’s thought that November will be much of the same – especially as the market starts to tip-toe into the slower winter months. And more than half of the country’s markets are currently seeing a drop of 10 per cent in activity than they had been prior to the new rules.

So if it’s not the rules that are cooling the market, what is then? Mr. Horgan thinks that it’s our shockingly high levels of household debt.

“We do have a home-grown risk,” he said when pointing to the household debt ratio of 163 per cent – a level that’s higher than it’s ever been. “This is something we pay a lot of attention to.”

That may be true, but just because government officials are concerned doesn’t mean that Canadian residents are. In fact, Bank of Canada Governor Mark Carney has stated repeatedly that we need to be more concerned about our “number one domestic risk.”

So to say that Canadians have been reigning in mortgage debt in an effort to reign in their total debt does seem a little far-fetched. And the fact that interest rates are lower than they’re going to be within the next five years would also certainly entice more buyers to the market – unfortunately, with the mentality that debt be damned.

With these observations, doesn’t it make the most sense that it is in fact, the new mortgage rules that have cooled the market?

Finance Minister Jim Flaherty was asked about the deputy minister’s comments. And while Mr. Flaherty did say that he agrees “that the full impact of the changes to mortgage rules has not been felt yet,” his comments do suggest that the new rules have had some effect. Even if we haven’t seen or felt the total impact just yet.

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