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Eric Lam, National Post
Thursday, Jun. 21, 2012

The federal government is taking another stab at getting Canadians to rein in their borrowing and spending, introducing new mortgage restrictions Thursday to cool the housing market.

The tighter rules, which include lowering the maximum amortization period on mortgages to 25 years from 30 years, lowering the maximum amount of refinancing to 80% from 85%, capping the maximum debt ratios for households and limiting government insurance to mortgages of less than $1-million, will come into effect on July 9.

“The adjustments we are making today will help [households] realize their goals, build on the previous measures we have introduced to keep the housing market strong, and help to ensure households do not become overextended,” Jim Flaherty, federal minister of finance, said in a release Thursday.

Here’s a look at how economists are evaluating the moves and their implications for the slowly recovering Canadian economy:

Derek Holt and Dov Zigler, economists, Scotia Capital

Home sales will accelerate very briefly over the next couple of weeks before the July 9th implementation period. We are more convinced of our view that the BoC is on hold until mid-2013 and with fatter tail risk in favour of a longer hold. Our bias is that strong cumulative regulatory tightening pushes out rate hikes, supports a buy-Canada-bond bias, poses downside risks to CAD, and will materially soften growth in housing, consumer spending, jobs, and add to already evident slowing in credit growth.

Robert Kavcic, economist, BMO Capital Markets

The reduction to a 25-year from 30-year period is equivalent to about a 0.9 ppt mortgage rate increase (assuming a 3.3% 5-year fixed rate and a $290k mortgage after 20% down on an average-priced $363k home). Notably, the impact is bigger than the switch from 35- to 30-year mortgages, which at current mortgage rates, would be equivalent to about 0.6 ppts of tightening. It’s also important to keep in mind that the amortization change won’t impact affordability across the entire market, but ra ther those that would be taking a 30-year amortization—according to the Canadian Association of Accredited Mortgage Professionals, that made up 40% of mortgages for purchase during 2011/12 (up to May).

Jennifer Lee, senior economist, BMO Capital Markets

April doesn’t look like a good month for the Canadian economy. The news that Canada would be tightening rules for government-insured mortgages (cutting the max amortization period from 30 years to 25 years), is an attempt to cool the housing market (FM Flaherty says they need to calm particularly the condo market in a few Canadian cities) and to slow the run-up in household debt that the Bank of Canada has been warning about to just about everyone. And so far, consumers are heeding the warnings. Canadian retail sales unexpectedly fell 0.5% in April, worse than the consensus view for a 0.3% gain, and our call of a 0.1% rise. It looks like GDP for April is coming in at a modest +0.1%, or flattish. In other words, the economy struggled to post any growth in April.

Tim Hockey, chief executive, TD Canada Trust

Canadian household debt levels have reached levels that raise concern. Today’s decisions by Minister Flaherty to move to a 25 year maximum amortization, as well as actions taken by OSFI, take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians’ debt levels.

Craig Alexander, chief economist, TD Economics

We view the changes announced today as a prudent decision to address the increasing risks from consumer debt growth. The regulatory action helps to take pressure off the Bank of Canada. The rapid personal debt growth in recent years has been fuelled by strong real estate markets in a sustained, incredibly low interest rate environment. Since the imbalance is concentrated in real estate, monetary policy would be a blunt tool to address the concern. Tighter regulations could target the risk more directly .

It should be noted that the tightening of the mortgage insurance rules is coming amid stricter guidance from OSFI, the chartered bank regulator, which includes limiting Home Equity Lines of Credit (HELOCs) to a maximum loan-to-value of 65% and imposing more restrictive equity lending criteria. Together, the new mortgage insurance rules and the more constrained supply of credit should go a long way in addressing the risks from personal debt and overvaluation in real estate.