Ottawa was concerned about the potential of triggering a housing market slowdown when it opted only to modestly increase minimum down payments on more expensive homes late last year, new documents show.
"Measures are needed to limit risk in the housing market, reduce taxpayer exposure and enhance long-term stability, but without being a significant drag on the housing market and economy," Department of Finance officials wrote in an internal memo to Minister of Finance Bill Morneau last November, little more than a month after the federal election.
In December, Mr. Morneau announced the government would increase the minimum down payment for insured mortgages from 5 per cent to 10 per cent for the portion of the home price between $500,000 and $1-million, saying the change would affect an estimated 1 per cent of the country's housing market.
In the memo, obtained by The Globe and Mail as part of an Access to Information request, federal officials raised concerns about the "pronounced increase" in the volume of insured mortgages with low down payments in Canada's two most expensive cities, citing a 20.9-per-cent jump in Vancouver and a 9.4-per-cent increase in Toronto in the first three quarters of 2015 compared to the same period a year earlier. That contrasted with an increase of just 3 per cent in the volume of high-ratio mortgages in other parts of the country.
(Scroll to the bottom to read the documents.)
"Despite prior actions, house prices and activity have continued to rise, particularly in Toronto and Vancouver, and ongoing low interest rates have led to further increases in household debt," the memo states. It added that the fact the boom was concentrated in just two local markets, "contrasts with the broad-based recovery following the Great Recession."
Internal calculations show the government expected the average minimum down payment to increase to 6.1 per cent in Vancouver, 6 per cent in Toronto and 5.9 per cent in Calgary, Ottawa and Halifax. Nationally, it expected the down payment on more expensive homes to increase by an average of $5,800.
The new down-payment rules would "target key markets where risks have been rising … and the most vulnerable borrowers," officials wrote, but would have "limited impact on overall employment and economic activity."
"As a result, the expected short-term impact of these policy actions is expected to be minimal and manageable."
Federal officials have also looked into the trend of buyers borrowing for down payments on homes worth more than $1-million.
Since homes above that price are not eligible for mortgage insurance, buyers typically have to pay a minimum of 20 per cent to qualify for a mortgage. In a memo from March, 2015, Department of Finance officials wrote that the requirement for buyers of homes worth more than $1-million to have down payments of at least 20 per cent "does not prevent down payments from being sourced from borrowed money."
The heavily redacted memo, which finance officials labelled as "for information," does not detail whether the government is concerned about the practice of borrowing for down payments on expensive homes.
It cites a consumer survey by the Canadian Association of Accredited Mortgage Professionals (the mortgage broker lobby group that has since changed its name to Mortgage Professionals Canada) that found borrowed money makes up about 28 per cent of down-payment funds for first-time buyers, a proportion it says has been stable since the 1980s.
The Department of Finance partially released 18 out of 635 pages of documents related to housing and mortgage industry regulations that The Globe and Mail requested under Access to Information legislation.