Toronto condo boom prompted new mortgage rules, Flaherty says

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Jim Flaherty is singling out Toronto's overheated condo market as one of the main reasons Ottawa is tightening the rules for insured mortgages.

The average price of a Toronto condo – $334,952 – was up in the first quarter of the year, as were total condo sales. In spite of anecdotal evidence of some cooling since, Canada's Finance Minister decided it was time to step in.

On Thursday, Mr. Flaherty announced a tightening of mortgage rules that he hopes will discourage Canadians from taking on too much debt and prevent a real-estate-driven hit to the broader Canadian economy.

Although Vancouver's housing market has also been strong in recent years, his comments made clear that the GTA's many new glass condo towers were on his mind.

"In Toronto in particular, what I've observed and heard about from developers is continuous building without restriction," Mr. Flaherty said. "It's distorting the market, quite frankly. And for that reason, we're taking the steps we're taking."

Those steps, which take effect on July 9, include dropping the maximum amortization period for insured mortgages to 25 years from 30 years.

Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.

There will also be a new rule to ensure a loan is not too big in comparison to household income. Finally, insured mortgages will be available only for homes with a purchase price lower than $1-million – an effort to ensure taxpayers do not back mortgages for the wealthy.

Senior bank executives were given a vague heads up on Wednesday that changes were on the way, but were surprised by the moves. Not all are certain these steps were required. The CEO of one of the big banks said he's concerned Mr. Flaherty's measures might affect the market too much, and that they will have a big effect on first-time buyers.

A source close to the Finance Minister said Mr. Flaherty has been preoccupied with the relentlessly lofty real-estate prices in Ontario's capital, his own backyard.

"He's been fussed about this for a long time," the source said. "He thinks the builders are out of control. … He spends a lot of time in Toronto, and he sees it."

Bank of Canada Governor Mark Carney, who was consulted on the measures, sharpened his own warnings about Toronto's condo boom last week.

But while many Canadians are heeding the warnings, and many others have reached the limits of their capacity to borrow, a substantial minority keeps taking on new loans that will be less affordable when interest rates rise.

Plus, with incomes stagnant in much of the country, and the situation in Europe threatening to infect healthier regions and cause job losses even in Canada, heavy debt loads are riskier. Junior minister Maxime Bernier, who joined Mr. Flaherty at Thursday's news conference, pointed out that Statistics Canada reported last week that the average ratio of debt to disposable income climbed to 152 per cent, up from 150.6 per cent at the end of 2011.

This trend, coupled with the realization that interest rates could stay low for a lot longer than the government expected, pushed Ottawa to act.

The latest changes also come after a seven-month exchange between Mr. Flaherty and top executives at Canada's biggest banks, who had been expecting the government to tighten the rules.

In December, a few of them signalled to Ottawa that they weren't seeing a significant impact on consumer borrowing from changes Mr. Flaherty made in early 2011, the third since 2008. However, Toronto-Dominion Bank CEO Ed Clark pointed out late last year that no bank was willing to act in isolation because rivals would steal market share.

Neither Mr. Flaherty nor Mr. Carney, who meet regularly, would comment on the discussions that led to Thursday's announcement. But they would have had plenty of time together on Tuesday night in the front section of the plane on a six-hour flight back from the Group-of-20 summit in Los Cabos, Mexico, with Prime Minister Stephen Harper and his chief of staff, Nigel Wright.

The changes effectively take Canadian mortgage rules back to where they were in the middle of the last decade, before the maximum amortization on a government-backed mortgage was gradually nudged up from 25 years.

"The government really over the last two years has been signalling these types of changes, so this shouldn't really be a surprise to anybody," said Peter Aceto, CEO of ING Direct Canada. "And they've definitely expressed their concerns about debt."

The reality of persistent low interest rates meant something had to give, he added.

The growth in household debt is partly due to several years of rock-bottom rates, which Mr. Carney hopes will help sustain growth through the global turmoil, while acknowledging that easy money can entice some to borrow too much.

Having said just last week that a worsening European crisis could be a "major shock" for Canada, Mr. Carney is not expected to lift borrowing costs before 2013.

At the same time, policy makers do not want households to get deeper into debt because rates will rise eventually. Right now, regulation is the only way to rein in housing-related investment, which Mr. Carney said in a speech on Thursday in Halifax now makes up "an unusually elevated share" of the economy.

"We just came back from the G-20 meeting of leaders and finance ministers, and the reality is that the European situation is very challenging, to put it mildly," Mr. Flaherty said. "So my job is to look at our own country, and look at the residential real-estate market, and make the best judgment that we can."