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The Canada Mortgage and Housing Corporation complex in Ottawa on Thursday Oct. 9, 2008.Sean Kilpatrick

The federal government's attempt to cool the housing market "may have come too late" to prevent a harsh landing for residential real estate, Moody's Investors Service is warning.

After Finance Minister Jim Flaherty announced last week that Ottawa is tightening the rules on government-backed mortgages to keep the housing market from overheating, Moody's said it is concerned the efforts may not be enough. High levels of household debt in Canada have left consumers with little flexibility to adapt to shifting markets, the credit rating agency said.

"The government's moves may have come too late, owing to the buildup in consumer debt that has already occurred," Moody's said in a research note Monday. "Canadian consumers' reliance on low interest rates to support high debt loads remains a risk."

Mr. Flaherty introduced several changes which the government hopes will result in a soft landing in the housing market, rather than a hard crash. Most notably, Ottawa reduced the maximum amortization on a government-backed loan to 25 years, from 30 years; and reduced the amount consumers could borrow against their home, to 80 per cent, down from 85 per cent.

It was the fourth time in four years the government has waded into the market to tweak mortgage rules to reduce the debt appetite of Canadians, who have sent household debt levels to record levels amid historically low interest rates.

Mr. Flaherty had been saying for the past six months that the government would step in "if necessary" but Moody's worries Ottawa may have waited too long, and that a soft landing may be difficult to engineer now.

Recent figures from Statistics Canada show the average ratio of debt-to-disposable income has climbed to 152 per cent, up from 150.6 per cent at the end of 2011.

"Previous rule changes had some effect in countering the stimulus provided by historically low interest rates but failed to stop Canadian household leverage from increasing," Moody's analysts William Burn and Andriy Stepanyants said in the report.

Economists have long been concerned that low interest rates, which have been kept low by the Bank of Canada to help support the economic recovery, have been enticing consumers to take on too much debt, since borrowing is cheaper than ever.

"Low interest rates are actually creating a domestic imbalance in terms of excessive household debt," Toronto-Dominion Bank chief economist Craig Alexander said. "Ultimately you're going to have to ween households off the drug of low interest rates."

However, despite taking several steps to cool the mortgage market, Ottawa did not touch the 5-per-cent minimum down payment required on mortgages. Sources told The Globe and Mail that at least two banks suggested to Mr. Flaherty that increasing the minimum payment would help curb borrowing.

Another proposal would have seen the down payment increased for everyone but first-time buyers, so as to not make it too difficult for new entrants in the housing market. Ottawa was reluctant to change the minimum payment, fearing it would have too harsh an effect on the market, and potentially make it more subject to a crash.

Mr. Alexander agreed, noting that an increase from 5 per cent to 10 per cent would have a "dramatic impact," though a one or two percentage point increase might be feasible. "It's still out there as a policy option," he said. "But I view raising the minimum down payment as the last resort if the market is out of control and you really need to slow it down quite sharply."

Peter Aceto, CEO of ING Direct Canada said rising household debt levels in the face of persistent low interest rates were a sign that the government needed to step in. "It tends to fuel spending behaviour," Mr. Aceto said. "So if rates are going to stay low for a while, at least we can get a little bit more conservative when we're buying houses and make sure people have more equity in the home when they buy it."