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Flaherty gives Carney room to skip a ‘blunt’ rate hike

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Flaherty acts on mortgages Finance Minister Jim Flaherty moved today to curb the explosive growth in consumer debt, unveiling new rules to cut the maximum amortization period to 30 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.

Mr. Flaherty also announced in Ottawa that the government will cut the maximum amount Canadians can borrow in refinancing mortgages to 85 per cent from 90 per cent of the value of their homes. The government is also withdrawing Canada Mortgage and Housing Corp. insurance on home-equity lines of credit, known as HELOCs.

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Mr. Flaherty's move comes after months of warnings by policy makers and economists that the debt burden of Canadian families is getting out of control.

Debt to disposable income now stands at a whopping 148 per cent, partly fuelled by home buyers taking advantage of historically low interest rates.

At the same time, home-equity lines of credit and loans have surged, rising over the past decade at almost twice the rate of mortgages and now representing 12 per cent of overall household debt.

Mr. Flaherty, saying he had discussed the matter with chief executive officers of the major banks, is particularly concerned over such home-equity loans, and the fact that financial institutions were insuring those through CMHC.

"I think that's particularly risky because some of those loans are not used to create housing in Canada," Mr. Flaherty told reporters.

"They're used to buy boats and cars and big screen TVs, things like that. And that's not the business that home insurance was designed for, mortgage insurance. "

Flaherty gives Carney room Mr. Flaherty is giving Mark Carney what he needs, using government measures to curb the rise in consumer debt rather than the "blunt instrument" of interest rates.

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Mr. Carney and others have been warning for months that burgeoning household debt is a mounting problem, not just for those who may not be able to juggle their payments when interest rates rise but for the economy as a whole in the event of a shock.

Some have asked why Mr. Carney and his colleagues at the Bank of Canada don't just raise interest rates again and cool things down. But to act on the housing sector alone would have other consequences at a time when the economy can least afford it.

There are too many unknowns in the global recovery now, as well as a strong Canadian dollar and a high rate of unemployment, for the Bank of Canada to raise rates again when it meets tomorrow. That's why most economists expect Mr. Carney to stand pat, and rightly so.

"As per speeches by BoC Governor Carney over time, addressing such factors is the focus of the Federal Finance Department versus using the blunt instrument of monetary policy to influence a specific sector like housing," Scotia Capital economists Derek Holt and Gorica Djeric said today.

"Higher rates at this juncture in order to address household sector imbalances would be imprudent."

Mr. Carney and his panel, who meet tomorrow, set interest rates, not Mr. Flaherty. The Finance Minister has acted via another avenue.

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"It's another way of getting the job done," said senior economist Jennifer Lee of BMO Nesbitt Burns.

Several economists said today Mr. Flaherty had just given Mr. Carney more time to weigh developments before moving, possibly too quickly, on another interest rate hike. Not that he was going to; most expected him to hold the line tomorrow anyway.

"The Bank of Canada just gained more room to manoeuvre before resuming its tightening campaign," said chief economist Stéfane Marion of National Bank.

Mr. Flaherty said today his timing had nothing to do with that of the Bank of Canada. And, indeed, warnings about high debt levels aren't new.

"The governor and I speak regularly and we discuss these types of issues regularly and of course we make an effort to make sure that government policy complements Bank of Canada monetary policy," Mr. Flaherty added.

What will the impact be? Toronto-Dominion Bank projects the new mortgage rules unveiled today will knock annual home sales down by about 20,000 and shave a further percentage point from prices.

The requirements announced by Mr. Flaherty could also pull forward sales by prospective home buyers hoping to beat the changes.

"The impact is not expected to be large, nor does it lead us to alter our annual forecast," said TD senior economist Paul Gauthier.

"Existing home sales were already forecast to weaken by about 8 per cent compared to 2010, and prices to slip by a modest 1 per cent. On aggregate, our calculations suggest that 20,000 sales (annually) may be impacted by the amortization change, with the average price likely to weaken a further percentage point."

Michael Gregory, Mr. Gauthier's counterpart at BMO Nesbitt Burns, believes the impact of the amortization change on payments is equal to a rise in mortgage rates of 56 basis points, or slightly more than half a percentage point.

"For the new homebuyer, the reduced amortization is a significant change that should soften the demand for homes/mortgages below what they otherwise would have been," Mr. Gregory said.

Added Shubha Khan of National Bank Financial: "While it is too early to gauge how many buyers will be priced out of the market, we have been anticipating tighter mortgage finance rules for some time (along the lines of what was announced) and have been forecasting mortgage volumes to decline by 7 per cent to 10 per cent in 2011."

Jobs to take further leave Steve Jobs is taking another medical leave from Apple Inc. , but will remain chief executive officer.

Chief operating officer Tim Cook will take over day-to-day operations, as he did during the last leave by Mr. Jobs, who has suffered from pancreatic cancer in the past, and underwest a liver transplant.

"I have great confidence that Tim and the rest of the executive management team will do a terrific job executing the exciting plans we have in place for 2011," Mr. Jobs said in a letter to employees.

"I love Apple so much and hope to be back as soon as I can. In the meantime, my family and I would deeply appreciate respect for our privacy."

Mr. Jobs said the board granted the medical leave so "I can focus on my health." He added he would still be involved in major strategic decisions.

Goldman won't offer Facebook to U.S. investors Goldman Sachs Group Inc. is shutting U.S. investors out of a private offering of shares in Facebook.

The Wall Street giant said today that it "concluded the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law," news agencies reported.

Such private placements, The Wall Street Journal reports, have to meet Securities and Exchange Commission rules, and the move suggests Goldman is concerned about SEC guidelines, though the bank didn't elaborate.

TransCanada faces challenge TransCanada Corp. faces a new legal hurdle over its plan to build a pipeline from the oil sands to Texas's Gulf Coast refineries, as landowners in Oklahoma head court to block the company's access to their land for its right-of-way.

In response to TransCanada's filing aimed at expropriating land for the Keystone XL pipeline, several farming families have challenged the constitutionality of a foreign company exercising eminent domain, The Globe and Mail's Shawn McCarthy reports today.

A spokesman for TransCanada, which wants to gain access to the biggest refining hub on the Texas coast, said that "our commitment is to treat landowners with respect and in good faith."

Euro ministers meet Finance ministers from the embattled euro zone are meeting in Brussels today and tomorrow, and are certain to discuss boosting the size of their bailout fund.

There are still divisions among the various governments in the 17-member monetary union, notably Germany's opposition to a hefty increase to the European Financial Stability Facility, or EFSF.

"Euro zone finance ministers meet in Brussels today and while the future of the EFSF will no doubt be discussed, major policy announcements are unlikely at this stage," said strategists Mark Chandler and Kam Bath of RBC Dominion Securities in Toronto. "Late last week, German Finance Minister [Wolfgang] Schaeuble maintained that a 'fundamental decision' would be taken in March."

The euro was down as the ministers prepared to meet.

"Event risk for the euro this week will come from two directions with the German coalition government increasingly split on increasing the size of the EU bailout fund ahead of today's key EU finance ministers meeting, as well as tomorrow's confidence vote in the Irish PM Brian Cowen on Tuesday," said CMC Markets analyst Michael Hewson.

"Indecision on the matter of the size of the fund will continue to dominate sentiment over the coming days, suggesting more volatility and uncertainty in the days and weeks ahead."

Trillions of e-mails, and a lot of junk As you clear out your e-mail inbox today after the weekend, consider this: E-mail users will receive tens of trillions of e-mails this year, a sizable number of them junk.

Projections by The Radicati Group – my daughters did the math based on the California research company's forecasts for average numbers received and the number of accounts – suggest corporate e-mail users will receive almost 22 trillion e-mails this year, more than 4-trillion of them spam.

The Radicati Group, which prepared its report last year, says there will be 788 million corporate e-mail accounts this year, rising to 991 million in 2014. Its projections also call for almost 2.4 billion consumer e-mail accounts in 2011, climbing to 2.9 billion in 2014.

Last year, the group says, the typical corporate e-mail user sent and received about 110 messages a day. Of those received, about 18 per cent was spam.

"While users mostly see spam as an annoyance, for corporations it is a considerable expense," Radicati said. "According to our projections, a typical 1,000-user organization can spend upwards of $3-million a year to fight and manage spam."

Boyd Erman's Morning meeting Sun Gro Horticulture, a peat moss producer that appeared on the trust scene in 2002, has agreed to be taken over for $6.60 a share by IKO Enterprises Inc., a privately held Canadian company, Streetwise columnist Boyd Erman reports today.

In Personal Finance today

Buying a U.S. winter getaway has never been more affordable – but there are caveats.

Home Cents blogger Noreen Rasbach weighs in on whether it's OK to sell or regift unwanted presents in tough times.

On Thursday, Jan. 20 at 1 p.m. ET, cross-border financial planner Robert Keats will take your questions on the implications of wintering in warmer climes. Follow this link to set an e-mail reminder for yourself.

From today's Report on Business

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Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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