Ottawa should consider steps to cool mortgage borrowing

C.D. Howe Institute recommends suggestions

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OTTAWA – The federal government may want to consider targeted steps to “lean against” the shift toward significantly bigger mortgages, a new report by the C.D. Howe Institute suggests.

But it cautioned against any broad measures such as raising the minimum down payment for all borrowers.

The report said there are several pockets of risk in the housing market, including risk faced by low-income Canadians, younger Canadians and buyers in some of the hottest markets.

“Household mortgage debt has risen dramatically and traditional economy-wide averages understate the degree of financial risk for those that carried mortgages because they typically divide the value of mortgages across the income of households with and without mortgages,” report-co-author Craig Alexander said Wednesday.

Alexander and his co-author, Paul Jacobson, suggested the steps that could be considered included raising required credit scores, capping total debt-service ratios at lower levels, increasing qualifying interest rates or varying the minimum down payment by the size of the mortgage.

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The strength of the housing market and household debt have been key concerns for the Canadian economy in recent years.

Ottawa has moved several times in recent years to tighten mortgage lending rules. However, household debt has continued to rise as interest rates remain low.

The concern comes when interest rates start to rise or if there is an economic shock that results in widespread job losses.

The report said most Canadians have been responsible in their borrowing, but low interest rates have allowed a significant minority to take on considerably more debt relative to their income.

For example, the portion of homebuyers with a mortgage debt-to-disposable income ratio in excess of 500 per cent has climbed from three per cent in 1999 to 11 per cent in 2012.

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The report noted young Canadians, often first-time buyers, have taken on larger mortgages, helped by low interest rates.

“There is a remarkable intergenerational effect taking place. Young real estate buyers are boosting home prices and real estate wealth for older homeowners, but are doing so by financing the purchases with ever greater debt,” the report said.

It also noted that mortgage debt-to-income ratios have posted their biggest increases in the country’s hottest real estate markets.

B.C. went from an average mortgage-to-disposable income ratio of 250 per cent in 1999 to 375 per cent in 2012, while Ontario increased from close to 200 per cent to around 350 per cent in the same period.

The report also said many borrowers may be vulnerable to financial shocks, with one in 10 homeowners with mortgages having less than $1,500 in financial assets to address an emergency and one in five with less than $5,000 in assets to access in a crisis.

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