Former Bank of Canada Governor Believes Feds Should Cool the Housing Market

Former Bank of Canada governor David Dodge spoke out this week saying that as the reality is house prices are more likely to go down rather than up in the next few years that the Finance Minister and Bank of Canada need to consider intervening to avoid a housing bubble. He didn’t comment on whether we are in a housing bubble at the moment saying that you don’t know you’re in a bubble until it bursts, but believes house prices are strong enough that Ottawa should take action.

“Whether there’s a bubble or not you can only see after the fact,” he added. But it wouldn’t take a bubble bursting to cause consumers pain. If your house price goes down 10 per cent and you’ve borrowed 95 per cent of its value, all of a sudden you’d be in hot water, Mr. Dodge noted.

His comments come as the debate on whether the Canadian market is in a housing bubble or not, has become a very hot topic since December 2009, especially after Finance Minister Jim Flaherty‘s comments that the government may consider adding additional restrictions on the mortgage market to slow down the housing sector. It’s a very fine line as this sector has been performing tremendously well while the economy was in trouble over the past year, and trying to rein in this sector alone while not affecting other struggling parts of the economy will be very difficult.

While it’s clear that low interest rates are heating up the market, it would not be wise to raise them just in order to calm housing because such a move would have other consequences, Mr. Dodge said.

He identified lending standards and the framework default mortgage insurance is issued by companies like the government controlled CMHC and private Genworth Financial, and said they are important tools and stands should probably have been tighter over the last little while. For example, he said that people putting down only 5% for a down payment isn’t enough, and that minimum down payments of 7.5% or 10% is probably better. This would make it tougher for first time home buyers to get on the property ladder and to get their first mortgage, as they would need to save more beforehand for a down payment. With an average house value of $300,000, currently prospective home owners, would need at least $15,000 as a down payment, versus $22,500 (7.5% down payment) or $30,000 (with a 10% down payment).

Genworth Financial‘s President has said that the company is already being more prudent by making sure mortgage applicants can handle mortgage rates of about 4%, despite variable rates being under 2% at the moment.

Related Topics

Economic News / Mortgage News / Mortgages

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