Federal government ready to deflate any housing bubble!

By Andrew Mayeda, Canwest News ServiceDecember 19, 2009

The federal government is ready to clamp down further on mortgage rules if the boom in the Canadian housing market turns into a bubble, says Finance Minister Jim Flaherty.

In an exclusive interview With Canwest News Service and Global National, Flaherty said the government is closely monitoring the red-hot housing market for signs that it is reaching “irrational” levels.

“The reality is we have low mortgage rates … so we can expect some upward pressure on housing,” he said. “That’s okay, as long as it doesn’t become a bubble. We’re watching that.”

If necessary, the government is prepared to further tighten the conditions under which the Canada Mortgage Housing Corporation insures mortgages, the finance minister said.

In July 2008, amid the fallout from the subprime mortgage crisis in the United States, the Finance Department announced that CMHC would shorten the maximum amortization period that it will accept to 35 years from 40, as well as require a down payment of at least five per cent of the value of the home. The new rules, which came into effect in October 2008, effectively made it more difficult for prospective homeowners to receive government-backed mortgages.

“If we have to, we’ll do what we did last year and limit the rate of amortization further than we already did, and require higher down payments,” said Flaherty.

His remarks come as some leading private-sector economists warn that the housing market might be getting ahead of itself amid a relatively modest recovery. In a recent report, Bay Street economist David Rosenberg estimated that housing prices are overvalued by as much as 15 to 35 per cent. This week, the Canadian Real Estate Association reported that sales of existing homes spiked 73 per cent year-over-year in November, while the national average sale price rose 19 per cent.

“If being 15 per cent to 35 per cent overvalued isn’t a bubble, then it’s the next closest thing,” said Rosenberg, chief economist for investment firm Gluskin Sheff.

In recent weeks, Bank of Canada governor Mark Carney has expressed concern about the amount of debt that Canadian households have been racking up since the central bank cut its benchmark lending rate to near zero. Flaherty also wants to remind Canadians that the easy money won’t last forever.

“Interest rates are at historic lows. They are naturally going to go up,” said Flaherty. “People have to make sure that the mortgage on their home that they’ve put on today will be affordable at higher interest rates in the future.”

The discussion of a potential housing bubble shows how much the economic climate has improved since the end of 2008, when it was still unclear how the world would pull out of the global financial crisis.

Looking back, Flaherty said the turning point was a meeting of the G7 finance ministers and central bankers in October 2008, where, after “a lot of finger-pointing by the Europeans at the Americans,” they agreed to backstop the world’s financial system.