Jim Flaherty's balancing act is getting harder.
For the past few years, the Finance Minister has been trying to prevent Canadian house prices and consumer debts from rising too quickly – without causing a major slump in the real estate market that would hurt the economy. Four times, he has changed Ottawa's rules governing mortgages to reel in overheated home prices.
It was expected that higher interest rates would do the rest of the work. But that's now in question, after the Bank of Canada pushed out the timeline for raising short-term rates. Longer-term rates are falling too: The yield on five-year government bonds has fallen from 1.9 per cent to 1.72 per cent in the past 10 days.
If that trend continues, mortgage rates will eventually fall, giving yet another push to a housing market that already has a lot of momentum. The average price of houses that sold over the Multiple Listing Service in September was $385,906 nationally, up 8.8 per cent from a year ago, in large part because pricey cities, such as Toronto and Vancouver, are rebounding from steep sales declines a year ago.
So will Mr. Flaherty be forced to intervene for a fifth time? "While we continue to monitor the housing market, we have no plans for further action at this time," he said Thursday.
In any event, it's not clear what tools he has left. Mr. Flaherty has already made most of the easiest changes, such as shortening the maximum amortization period on government-insured mortgages to 25 years. And his favourite tool – verbal warnings to consumers that rates will ultimately rise – are losing traction in light of the central bank's decision to remove its bias towards higher rates.
"Housing has been the big driver," says Jim Murphy, head of the Canadian Association of Accredited Mortgage Professional. "If you slow the housing market, what's going to take its place in terms of the domestic economy? It turns out it's not the export sector, and now they're predicting lower growth. If we keep slowing housing and slowing housing, will that just make things worse overall?"
Still, Mr. Flaherty does have some options. Those range from the small tweaks to the standards that consumers must meet in order to qualify for mortgage insurance – which is mandatory for buyers whose down-payment is less than 20 per cent – to more severe changes, such as increasing minimum down-payments.
But it is unlikely that policy-makers will take any action this. Economists and experts have been in wait-and-see mode, because the general view has been that much of the market's strength in recent months stems from buyers jumping into the market earlier than they otherwise would have in order to beat potential mortgage rate increases.
It will take at least two more months of housing data to properly assess whether the market's rebound is temporary or has legs. "They really have to wait at least until November or December," said Canadian Imperial Bank of Commerce economist Benjamin Tal.
There are some minor moves that Ottawa is already planning that could have a bit of a cooling impact on the market. Sources say the Department of Finance has circulated a discussion paper on portfolio insurance. It proposes some changes such as limiting portfolio insurance to terms, such as five years, rather than having it be for the full life of the mortgages, and taking away the ability of banks to substitute one mortgage for another within a portfolio. Changes such as these would further reduce Ottawa's exposure to the housing market.
And the Office of the Superintendent of Financial Institutions is still putting together a set of underwriting guidelines for mortgage insurers that could place new restrictions on the way they do business.
OSFI has also been weighing the possibility of tightening the mortgage underwriting guidelines for banks, something that would have a larger impact on the housing market. The regulator has been exploring the prospect for a while and decided not to take any action in the spring, at a time when the market was still climbing its way out of the slump that ensued after Mr. Flaherty tightened the mortgage insurance rules in the summer of 2012. (That set of rule changes, which included cutting the maximum amortization of insured mortgages to 25 years from 30, was the fourth that Mr. Flaherty has made in the past five years in an effort to curb consumer debt loads and house prices.)
OSFI has been monitoring the market again this fall, and collecting more data from banks. If it decides to change the lending rules it will hold public consultations first. The possibilities open to the regulator include tightening the rules around uninsured mortgages, for instance by cutting the maximum amortizations of such loans to 25 years, to bring them inline with the rules for insured mortgages.
Any moves that policy-makers might take will potentially have other consequences that must be weighed. For instance, if OSFI alters the rules that govern the big banks and other federally regulated lenders, it could tip the playing field in favour of credit unions and other provincially regulated lenders.
More broadly, any significant moves that bite into the market will slow economic growth. Bank of Canada Governor Stephen Poloz noted Wednesday that "extra growth in the housing market" helped pull the country through the recent period without a major downturn.
And if the finance department continues to make it harder for first-time buyers to get into the market, "it will cause some issues that may have a longer-term impact," said Royal Bank of Canada economist Robert Hogue.
"What we're missing is rising rates," Mr. Murphy said. "Rising rates would solve the problem." That is the opinion of Bank of Nova Scotia CEO Rick Waugh, who spoke out last month saying that if policy-makers are concerned about house prices then the Bank of Canada should raise interest rates. Rather, the central bank decided to remove its bias towards higher rates as it worries about sluggish exports and continuing struggles in Europe.