Blog by Jim Hawke

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Will Flaherty be forced to intervene again?

The rebirth of Canada ’s housing market has observers wondering whether Finance Minister Jim Flaherty might intervene again.


He said this week he has no plans to do that at this point, but the powerful rebound means he certainly has a wary eye on the market.


As the Globe and Mail’s Tara Perkins has chronicled, the market slumped in the summer of 2012 after Mr. Flaherty moved to head off a bubble with another round of restrictions.


But it seemed that the nation’s real estate agents barely had time for a vacation before the effects wore off and a rise in mortgage rates, with expectations of further increases, pushed buyers into the market before they might have otherwise moved.


Add to that the fact the Bank of Canada has now abandoned its long-held signal of a rate hike, promising an even longer period of cheap money.


There are different schools of thought here, as you’d expect.


Chief economist Avery Shenfeld of CIBC World Markets says there’s no need for Mr. Flaherty to stick his nose in again.


“It’s not the number of houses changing hands in a given month that is of concern, but whether the size of each mortgage being issued lines up with the borrower’s ability to pay at current and future interest rates,” Shenfeld said.


“On that score, there’s no doubt that several rounds of tightening in mortgage insurance rules are having their desired effect. At a given income and down payment, it’s simply not possible to qualify for as large a mortgage as was the case a few years back.”


True, borrowing picked up again this fall, Mr’ Shenfeld said, but “that’s likely just pulling ahead activity from the future, as Canadians try to keep ahead of expected higher rates down the road.”


“In terms of any new regulatory measures, for now, it would be wise to let sleeping mortgage rules lie,” Shenfeld said.


Michael Gregory, the deputy chief economist at BMO Nesbitt Burns, isn’t so sure. For him, it’s a wait and see thing.


“Poloz and Partners are obviously betting that the recent heating up of the housing market is a temporary phenomenon,” Mr Gregory said, referring to Bank of Canada Governor Stephen Poloz and his colleagues.


“And if it turns out not to be temporary, then the government will act again on the macro-prudential policy front.”


Mr. Flaherty does have more in his toolkit, the BMO economist added, such as raising the minimum down payment or tightening the rules on uninsured loans.


“Now we wait.”

 from the Globe and Mail