Thursday, October 29, 2009

Homeowners should brace for increased debt

Reprinted courtesy Chronicle Herald

BANK OF CANADA governor Mark Carney has repeated his concern that Canadians may be getting in over their heads in the purchase of homes, saying the government has ways of slowing the market.

Carney told a Senate committee Wednesday afternoon that the central bank is conducting an analysis of whether Canadians are taking on too much debt, particularly in buying homes.

Canada’s housing market has rebounded more strongly than other parts of the economy with sales at times at record levels, although prices remain depressed.

The central banker said ""exceptionally low" mortgage rates are luring Canadians into taking on mortgage debt to purchase homes. Deputy governor Paul Jenkins said the effective variable rate is at 2.25 per cent, a post Second World War low.

"Over the lifetime of a mortgage, they will normalize (so) it’s only prudent that people look through the life cycle of rates to ensure they are borrowing appropriately," Carney said.

"And it’s also appropriate and prudent that financial institutions (lenders) take that into account as well."

High debt at extremely low teaser mortgage rates that eventually spiked higher eventually led to a collapse in the U.S. housing market. That triggered a financial crisis on Wall Street and the recession that swept around the world in the last 18 months.

Carney said he does not believe the central bank should use its power to raise interest rates to discourage Canadians from taking on too much debt, but he added there are other means of achieving the same result.

He noted that policy makers have the ability to influence financial institutions that issue mortgages, both through regulation and pressure, including the ability to change the terms of mortgage insurance.

Last July, Ottawa tightened the rules for government-guaranteed mortgages by limiting the maximum amortization period to 35 years and by requiring a minimum five per cent downpayment on house purchases.

Carney said he was speaking hypothetically, but added: "If this were to persist, there are other options. The housing market is subject to considerable regulation and policy influence.

""That would be the way to approach it."

Carney expressed concern over the potential creation of a housing asset bubble last week, but Wednesday’s comments were the first in which he speculated what action policy makers might take.

In other testimony to the banking committee, Carney said he was confident Canada’s economy would recover, although weakly, and that private businesses will be in position to carry growth forward once government stimulus spending winds down.

Government stimulus will add about one per cent to gross domestic product next year, one third of the growth projected by the bank, he said.

"Once government stimulus is withdrawn, the bank expects at the beginning of 2011 that corporate investment, private investment will increase," he said.

Ben Sage, Sales Representative. Re/Max a-b Realty Ltd., Brokerage. 519-536-7535. 521 Dundas St., Woodstock, ON

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