The head of ING Direct Canada and several economists are warning Ottawa not to make abrupt changes to mortgage rules, lest that trigger the very thing everyone wants to avoid - a swooning housing market.
While Ottawa should increase scrutiny of the Canadian real estate market, acting too quickly to impose new blanket rules on mortgages could have the unintended consequences of toppling the market, they say.
Most expect the market will cool off by itself later this year even as some, including the Bank of Nova Scotia, acknowledge house prices are now in bubble territory.
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"High level, one-stroke fixes are too simple, and can have a very large impact," said Peter Aceto, chief executive officer of ING, the country's sixth-largest mortgage lender. "I worry about government-based tightening of the mortgage rules creating a much worse reaction - too fast of a cooling, which is not really good for anyone."
He stops short of saying Canada is in a housing bubble, but says the market "is hot and we are seeing some irrational behaviour," such as frenzied bidding wars.
The comments come as Finance Minister Jim Flaherty is preparing the federal government's March 4 budget. He said last weekend that Canada is not in a bubble, though he is watching developments closely. Bank of Canada Governor Mark Carney has repeatedly said there's no bubble, but cautions Canadians against taking on more debt than they can afford when interest rates start to climb.
House prices rose 19 per cent nationally last year, and are set to climb another 5.4 per cent to a record this year, the Canadian Real Estate Association says. A confluence of factors are driving demand, including tight supply, expectations of rising interest rates, the new HST set for summer in B.C. and Ontario, and rising confidence after people sat on the sidelines during the recession.
Canada is not the only one in a quandary over bubbles and what to do. Sweden's central bank is appointing a commission to look into risks in its housing market, after prices soared in recent years.
In Asia, low rates are prompting investors to flock into real estate in China, Hong Kong and Singapore, driving prices higher, ratings agency Fitch warned this month. It advised Taiwan's government to take steps to curb a bubble.
The buying spree in Canada is enough to worry some top bankers, who have privately asked the government to cool the market by tightening mortgage rules - such as increasing the minimum down payment on homes to up to 10 per cent from 5 per cent, and reducing the maximum allowable amortization period to 30 years from 35.
New rules from on high are not necessary, Mr. Aceto said. "The banks in this country don't have to lend to the limit of the law - they can make smart rules on their own and not have Minister Flaherty make the decision for them."
Patricia Croft, chief economist at RBC Global Asset Management, said it would be "shocking" if the minister introduced new rules in the coming budget. "I don't think there consensus yet on whether there's even a problem."
The federal government has made swift moves in the past. In July, 2008, it reduced the maximum amortization period to 35 years to 40 years and required new minimum down payments of 5 per cent rather than zero down.
Some lenders argue that tightening the rules will bolster, not burst the market. Trimming the amortization period to 30 years, and asking home buyers to increase down payments, would cool the market only slightly, and ensure a more secure market in the longer run, said Gerald Soloway, head of Home Capital Group Inc., which has about 40,000 mortgages in Canada.
"We should try to avoid ... getting anywhere near some of the terrible consequences of the U.S. ... and this is just a bit of tweaking which would help make the long-term market very secure," he said.
Tavia Grant