Finance Minister Jim Flaherty is tightening up the country's mortgage rules in a bid to stop borrowers from taking on potentially crippling debt loads.
Mr. Flaherty will announce in Ottawa Tuesday morning that he is imposing new rules that will dictate how banks approve mortgages, and that certain borrowers will have to come up with larger down payments.
While he is expected to stress that the government does not believe there is a housing bubble right now, his fear is that low interest rates are enticing some consumers to get in over their heads.
Specifically, Ottawa has been concerned that some borrowers who are taking out variable-rate mortgages will struggle with their monthly payments when interest rates rise.
That could damage the economic recovery if consumer spending suffers as homeowners dedicate a greater proportion of their income to mortgages.
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Tuesday's announcement comes after informal consultations with mortgage market players, banks, and other experts. Late last year, CEOs of Canada's major banks privately cautioned Ottawa that they had concerns about the level of mortgage debt some consumers are taking on.
The changes to be announced Tuesday will ensure that banks add an extra level of assurance into their evaluations when they are weighing whether to approve a mortgage. The goal is to ensure that the bank is comfortable that the borrower will be able to afford the monthly payments when interest rates rise.
A debate has been brewing recently about whether Canada is experiencing a bubble in housing, one of many asset markets around the world that economists are keeping an eye on as low interest rates and massive stimulus funds create hot pockets.
China last week took steps to rein in lending for the second time in a month, ordering banks to increase their reserves in a bid to slow the country's property market and soaring global prices for commodities, which have been buoyed by China's liberal lending policies.
The government does not believe that there is a bubble in Canada, but will act to stave off future trouble, sources say.
Many experts have cautioned the government to tread carefully and avoid taking too much steam out of the housing market, a key driver of the economy's turnaround.
As a result, the government began looking to change the rules that govern whether a bank approves a mortgage borrower.
Ottawa deliberately stoked the housing market during the crisis. It bought more than $65-billion worth of mortgages from lenders, giving them a cheap source of funds and allowing them to lend more.
Like Mr. Flaherty, Bank of Canada Governor Mark Carney has expressed doubt as to whether the months-long buying spree in housing will form a bubble.
The central-bank chief has warned since December that some Canadians may be taking on more debt than they will be able to handle when interest rates rise - which could be as early as July.
But he and other Bank of Canada officials have also suggested that a regulatory approach to cooling the housing market would make more sense.
Bank adviser David Wolf, speaking on behalf of deputy governor Timothy Lane last month, said that because the central bank's mandate is to set rates to keep inflation on target throughout the economy, any tinkering in a specific sector, such as housing, is up to Mr. Flaherty.
"If the bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water," Mr. Wolf said in Edmonton.
Former Bank of Canada governor David Dodge last week argued that because house prices are more likely to go down than up over the next few years, standards for insuring certain mortgages should be tighter.
The Canadian Real Estate Association is expected Tuesday to provide the latest figures on the home resale market, which has smashed records for months.Report Typo/Error