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The aim of the tightening would be to avert a possible housing bubble, but some analysts say a cautious approach is needed to avoid damaging the economy. Senior economist Benjamin Tal at CIBC says going too far could slow down or even shut down the housing market – a market that is a major contributor to overall economic growth.
“That is a risk they have to take into account, because the housing market is a major, major contributor to overall economic growth and we are still in a very fragile state of the recovery.”
However, Tal took some comfort from the fact that Flaherty was not specific as to the numbers it might consider.
“The trend (on consumer debt) is not extremely positive but the situation is not alarming,”
“I think they’re concerned about the next 12 months and where we will find ourselves a year from now. So they’re trying to be pre-emptive here and basically start to make sure the inflow of new business is of a higher quality.”
“Therefore I don’t expect this to be a huge increase (that would have)… an unreasonable and unnecessary impact.”
The Bank of Canada in recent weeks has warned repeatedly that record household debt is the biggest risk facing the country’s financial system. The central bank did note that the risk to Canada’s banking system was small, but worried that when interest rates rise to normal levels, up to 10 per cent of households could face difficulties in meeting monthly payment requirements.
Flahert said one thing the government will likely do is increase the minimum down payment on residential mortgages from five per cent “to a higher figure.” It may also reduce the amortization period from the current maximum of 35 years. However, in a recent interview, Flaherty emphasized that the prospect of a housing bubble is “not an immediate concern.”
“If we needed to act, we could do what we’ve done before, in the summer of 2008, and that is to increase the down payment requirements for insured mortgages.”
“I haven’t looked at what we might do in terms of quantum (size of increase),” he said, adding that the government might also shorten the maximum amortization period or take other, unspecified measures to tighten lending requirements.