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RBC Concerned about New Mortgage Rules

3 July 2012

Most of the time playing the mortgage and housing market game is like walking a tightrope – especially if you’re the policymaker that’s making the final decision. Give the line too much slack, and it’s going to collapse. Keep it too tight, and it will break. Jim Flaherty certainly knows this, and RBC seems to as well. That bank, while it says it agrees for the most part with Flaherty’s new mortgage rules, also says that the rules will have to be closely monitored to make sure that the rope is in balance. And that, after rates rise, the line may need to be checked and adjusted once more.

“It’s hard to argue that they shouldn’t be doing something to slow this down,” says David McKay, head of Canadian banking at RBC when speaking of the new home refinancing rules and new insurance rules for government backed Canadian mortgages. “But what is the longer term implication of all this in a higher rate environment? And do we pull back too tightly on the reins?”

Mr. McKay admits that with a few extremely overheated markets in Canada, and the amount of debt Canadians keep taking on in second mortgages, that something had to be done. But, he also says that when conditions change in the housing and mortgage market, they may have to be changed once again. And he also says that could prove to be more difficult.

“This is not like turning a Ferrari,” he said. “This is like a big ship. And it takes a while to turn. And sometimes of you over steer, you can’t re-steer the other way.”

Mr. McKay would like to see the mortgage rules analyzed and revised once rates go up again – something our government has been reluctant to do thus far given the state of the global economy.

“Would we consider going back to a 30-year amortization when we are able to raise rate, to alleviate the strain on the consumer wallet, and balance growth in the economy?” Mr. McKay asked. “That is obviously a long-term worry.”

But should it be a long-term worry really? Mr. Flaherty has changed the rules to mortgages four times in just as many years. He’s clearly not afraid to step in when it’s deemed necessary; and he likely will once again when the rates rise and if he thinks it’s necessary.

Until then, no one knows what the tightrope will do; and government officials are saying it’s too soon to say whether or not they’ll bring 30 year amortizations on government-backed mortgages.

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