When current Bank of Canada governor Mark Carney recently appeared before a group of British MPs, who were questioning him on his appointment as the head of the Bank of England, he told them that Canada was better off curing its household debt problem by tightening mortgage rules rather than raising interest rates.
To that effect, the Bank of Canada announced it is likely that its current one-per-cent interest rate would probably remain in place until 2014.
When announcing the retention of the interest rate, the central bank said in a release that rate hikes are “less imminent than previously anticipated,” acknowledging that household debt growth had decelerated.
“The growth of household credit has shown signs of moderating in recent months,” Timothy Lane, the deputy-governor of the Bank of Canada, said in a presentation to the Weatherhead Center for International Affairs at Harvard University on February 12. “The momentum in house price growth, sales of existing homes, and new construction has also moderated.”
Lane echoed Carney by saying that “targeted prudential measures” are the best method to attack a nation’s financial vulnerabilities, rather than hiking interest rates, which could affect Canadian exporters and other industries.
“The Canadian government has tightened regulations pertaining to government-backed insured mortgages four times — most recently in 2012.”
In July 2012, federal Finance Minister Jim Flaherty announced a lowering of the amortization period for Canada Mortgage and Housing Corporation (CMHC)-backed mortgage insurance from 30 to 25 years.
Mortgage debt is but one factor of overall household debt, with other debt being incurred through such items as credit cards, car and home equity loans, etc. The most recent Statistics Canada report in December last year, showed household debt was at 164.6 per cent of annual disposable income, a slight increase from the previous quarter.
Real estate industry analysts agree that the new mortgage regulations have contributed to a cooling in the Canadian real estate market, although the effect has varied in different regions of the country.
“Successive rounds of tightening mortgage regulations have kept the housing market in check during what has become an extended low interest rate environment,” said CREA’s chief economist Gregory Klump.
Even in Canada’s biggest housing markets of Toronto and Vancouver, which have witnessed downturns in recent months, industry analysts expect the two markets to remain relatively stable through 2013, with no fear of a U.S.-style housing bubble emerging.
According to Jim Murphy, the CEO and president of the Canadian Association of Accredited Mortgage Professionals (CAAMP), “The vast majority of Canadian mortgage holders, whether they are first-time buyers or long-term homeowners, are acting responsibly when it comes time to reducing their mortgage indebtedness.”
Carney told the House of Commons Standing Committee on Finance in Ottawa on February 12 that caution about high debt levels has begun to restrain household spending.
“The bank (of Canada) expects trend growth in household credit to moderate further, with the debt-to-income stabilizing near current levels,” said Carney.
“More normal times will return,” said Lane, “and with more normal interest rates and costs of borrowing.
“It is the responsibility of households to ensure that they can service tomorrow the debts they take on today,” he added.