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Finance official questions link between cooling housing market, mortgage rules

Deputy minister of finance Michael Horgan

KEVIN LAMARQUE/REUTERS

Canada's deputy minister of finance says he isn't convinced tighter mortgage rules his department announced in June are behind the recent cooling in the housing market.

In a rare public speech, Michael Horgan argued that recent comments linking the two are premature.

"There's some evidence that the housing market, particularly in some markets, is cooling and slowing at the moment," he said Monday during a presentation to business students at Carleton University. "We read a lot of press commentary that's saying it's because of the government's changes to mortgage insurance rules. I think it's actually too early to make the direct link."

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In June, Finance Minister Jim Flaherty announced that Ottawa would reduce the maximum amortization for a government-insured mortgage to 25 years from 30. Ottawa also limited the amount of equity that can be borrowed against a home to 80 per cent of a property's value, down from 85 per cent.

The move effectively eliminated 30-year mortgages in Canada and followed a tightening in 2010 that ended government insurance on 35-year mortgages. In 2008, the government stopped insuring 40-year mortgages.

In recent weeks, several economists have issued reports or made comments in the media linking the latest housing market data to the policy change.

Earlier this month, the Canadian Real Estate Association reported that Canadian home sales were down 15.1 per cent in September from a year earlier. More than half of the country's markets were down by at least 10 per cent.

The association's chief economist, Gregory Klump, told The Globe and Mail at the time of the report's release that the data were linked to Ottawa's June moves.

"The recent mortgage insurance changes are working, it is cooling the market and sales have ratcheted down compared to a year ago," said Mr. Klump.

It is the kind of analysis that leaves Mr. Horgan unconvinced. While he says there is likely some cause and effect at this point, he suspects it is more likely that Canadians are starting to realize their household debt levels need to be addressed.

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Mr. Horgan pointed to data released this month that the ratio of market household debt to disposable income hit 163 per cent in the second quarter, which the deputy minister noted is at similar levels as those in the United States before the recession.

"We do have a home-grown risk," he said, as he listed Canada's housing market among a group of factors that could throw Canada's projections off track. "This is something we pay a lot of attention to."

Mr. Horgan has been Mr. Flaherty's deputy minister since September, 2009. The career federal public servant was Canada's representative at the International Monetary Fund before becoming the Finance Canada deputy.

During an appearance on CTV's Power Play, Mr. Flaherty was asked about his deputy minister's comments.

"I'd certainly agree that the full impact [of the changes to mortgage rules] has not been felt yet," said the Minister.

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