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Don't tighten mortgage rules, Ottawa urged Add to ...

The head of ING Direct Canada, the country's sixth-largest mortgage lender, is warning Ottawa not to pull back too quickly on mortgage rules, lest that causes the very thing everyone wants to avoid - a swooning housing market.

While Ottawa should increase scrutiny of the percolating Canadian real estate market, acting too quickly to impose blanket new rules on mortgages could have the unintended consequences of toppling the market, he said Tuesday.

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.

"High level, one-stroke fixes are too simple, and can have a very large impact," said ING Direct chief executive Peter Aceto. "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 stopped short of saying Canada is in a housing bubble. Still, the market "is hot and we are seeing some irrational behaviour" such as people engaging in bidding wars and waiving all conditions in buying a new house, he said.

The comments come as Finance Minister Jim Flaherty is preparing the federal government's budget, set for March 4. He said this weekend the country is not in a bubble - though he is watching developments closely. Bank of Canada Governor Mark Carney has repeatedly said there's no bubble, though he has cautioned 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 this year to a record this year, according to the Canadian Real Estate Association. A confluence of factors are driving demand, including tight supply, expectations of rising rates, a rush to buy before the introduction of a new sales tax, and a rebound in confidence after people sat on the sidelines through the recession.

The buying frenzy 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 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."

Scotia Capital economists Derek Holt and Karen Cordes also warned in a research note that a sharp reversal by Ottawa could pop what it believes is a price bubble.

"You can't go from 100 km/h to zero in a nanosecond without suffering harsh consequences," they wrote. "Newton's third law is the best caution that can be served up with respect to abruptly altering Canadian mortgage rules as per some of the whisper talk leading up to the March 4th federal budget after the currently government sharply liberalized the mortgage market in early 2007."

Mr. Holt and Ms. Cordes urged Finance Minister Jim Flaherty to stay away from sweeping, across-the board tightening, though fine tuning would be acceptable, as they believe house prices will cool on their own, driven by the market.

"Compound that effect with abrupt rule changes, and poof, hopes of a soft landing face even greater risk of a price bubble popping."

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