Finance officials have met in Ottawa on Monday with some of the country’s leading economists for pre-budget discussions and the subject of whether to tighten housing regulations may come up.

Much of the discussion about changing the mortgage rules  stem from comments made by the Bank of Canada governor, who last week warned that consumer borrowing could not continue at its present clip.

“Canadian household balance sheets are becoming increasingly stretched,” said Mark Carney, who issued a warning to legislators about taking steps to contain the growth of personal debt. “Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks.”

Finance Minister Jim Flaherty emerged from Monday’s meeting stating that:

“We’re in a different world today We’re not going to see the boom times that we saw before…  This is not a time of booming economic growth… We’re in a time of high uncertainty, particularly with respect to the United States’ economy.”

However Flaherty also said there are no plans to further tighten mortgage rules. But he added his department keeps tabs on consumer debt and he isn’t ruling out further tightening down the road.

“We continue to watch. If it’s necessary to tighten the rules further, we will tighten them further. Our concern is always ensuring that the housing market does not overheat and, in particular, that the mortgage market does not overheat. We watch affordability, we watch to ensure that marginal investments are guarded against.”

The government has to balance the impact any changes in mortgage rules might have on the overall economy. According to July GDP data, the home resale market fell significantly for a third consecutive month, and led to an 8% decrease in the output of real estate agents and brokers. The output of real estate sector is now at about two-thirds of the level recorded at the beginning of 2010 when housing was hot, Statistics Canada data indicates.

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The threat of a renewed slowdown in the United States and slowing momentum for the Canadian economy has the Bank of Canada cautious about its next move. In Windsor, Ontario, Mark Carney said Canadians should brace for months of “modest” economic growth, acknowledging this will be reflected in the bank’s revised forecast to be released on October 20, in which third-and fourth-quarter estimates would be lowered. Any additional increases to interest rates in this uncertain environment would warrant “caution,” he added.

But despite heightened expectations that the central bank will pause at its next meeting, potential housing regulation and the next round of employment data may influence the decision.

After two recent increases to its overnight rate, Bank of Canada governor reiterated that “financial conditions remain exceptionally stimulative.” He also warned that while Canada’s situation and the inflation target dictate a different policy stance than in the United States, “there is a limit to this divergence.”

Canadian households have been running a net financial deficit for 37 consecutive quarters, and Mr. Carney acknowledged that the current situation in which investment in housing is outstripping total savings cannot continue.

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Canada Housing and Mortgage Corporation (CMHC) has released the 2010 Canadian Housing Observer, a detailed annual review of housing conditions and trends in Canada and of the key factors behind them.

The annual Housing Observer report examines the state of Canada’s housing from a variety of perspectives, combining national coverage with provincial/territorial and metropolitan detail and discussing influences on housing demand, current market developments, housing finance, housing affordability, and other topics.

Some of the highlights of the 2010 report are:

• Housing-related economic activity accounted for $307 billion in 2009, over one-fifth of Canada’s total gross domestic product.
• The residential construction sector is comprised of  numerous labour-intensive small businesses—some 71,000 residential construction firms and 158,000 specialty trade contractors in 2009—that can enter and exit the sector with relative ease, thanks in part to the relatively modest investment in fixed capital required for prospective firms and the extensive use of subcontracting.
• Canada’s Economic Action Plan in Budget 2009 provided a  total of $7.8 billion in tax relief and funding of actions to stimulate the economy through housing. When provincial contributions are taken into account, the total stimulus value is $9.2 billion.
• The Government of Canada commitment in figures:
  • 2008 of $1.9 billion over five years to invest in housing and alleviate homelessness
  • Canada’s Economic Action Plan (Budget 2009) which announced a one-time investment of more than $2 billion over two years to build new and repair existing social housing
  • Up to $2 billion over two years in low-cost loans to municipalities through CMHC to fund housing-related municipal infrastructure projects.
• Real estate—which includes principal residences and second homes—accounts for over 40 per cent of the assets of households.
• Throughout Canada, mortgage arrears remained low and mortgages remained available.
  Historically low mortgage interest rates benefited home buyers as well as those renewing or refinancing their existing mortgages.
• By October 2009, the use of the Bank of Canada’s regular short-term liquidity facilities had declined to nearly half of the level of its peak use of $40 billion in December 2008.
• The Insured Mortgage Purchase Program had lower auction volumes in 2009 than in 2008, and was ended in March 2010. It resulted in purchases through auctions of $69 billion of National Housing Act Mortgage-Backed Securities
• Sales of existing homes through the Multiple Listing Service® (MLS®), which had trended lower in 2008, began to recover in January 2009. Overall, MLS® sales reached 465,251 units in 2009, up from 431,823 in 2008.
• Historical lows in interest rates, when coupled with a small inventory of existing homes listed for sale, helped to push the average MLS® price up by 5.0 per cent in 2009 to $320,333.
• To a large extent, resale price gains in 2009 reflected a rebound back to levels that prevailed prior to the economic downturn. In particular, measured from the fourth quarter of 2007 to the fourth quarter of 2009, resale home prices rose 7.1 per cent. This translates to an average annual rate of price growth of 3.5 per cent over this period, which is in-line with average historical rates.

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2010 Canadian Housing Observer