It will be tougher to get a mortgage in future, survey of economists predicts

OTTAWA — The federal government will make it tougher for many homebuyers to get mortgages this year as it grapples with an overheated property market, according to analysts in a Reuters poll, who also ruled out the prospect that prices could suddenly crash.

Ten of 14 economists and strategists surveyed last week in Reuters’ first poll on the Canadian housing sector answered “yes” when asked if they thought Ottawa would tighten mortgage rules within the next 12 months.

They expect home prices to climb just 0.1 per cent in the year to December 2012, and the same in 2013. That is down from a 0.9- per- cent year- onyear increase in December 2011.

If Finance Minister Jim Flaherty tightens requirements for governmentbacked insured mortgages it would be his fourth intervention in the real estate market since 2008.

Flaherty could raise the minimum downpayment to buy a home from the current 5 per cent or reduce the maximum amortization period from 30 years.

Any move would likely come before the prime spring real estate season, analysts said. “Sometime between now and the next budget,” said Benoit Durocher, senior economist at Desjardins in Montreal, on the timing of such a move.

The federal budget is expected in late March.

The poll respondents see the housing market as moderately overvalued, particularly in Toronto and Vancouver.

“There is some genuine concern that the housing market and households have been overstretched,” said Mazen Issa, economist at TD Securities.

“But in the absence of several triggers for a housing market decline, which are not likely to be forthcoming until at least the middle of next year, the underlying theme is of gradual moderation,” he said.

Possible triggers would be a rise in mortgage rates or a sharp rise in unemployment.

Canada’s robust housing market helped pull the economy out of the 2008 recession. Prices dipped briefly during the downturn, but quickly resumed the climb that characterized the previous decade.

But that effervescence is now a headache for policy- makers, as historically low interest rates tempt more and more people to take out mortgages for increasingly unaffordable homes.

Household debt levels are approaching those in the United States before the 2008- 09 housing meltdown there. Canada’s debt- to- income ratio hit a record 153 per cent last year and is expected to rise.

The Bank of Canada, which has fanned the flames by holding its benchmark lending rate at 1 per cent for an unprecedented 17 months, has made it clear that rates are likely to stay unchanged for at least this year.

Of the nine forecasters who answered a question on how far prices would fall before stabilizing, the median decline was 5 per cent, with four predicting price stabilizing beyond 2013.

The economists see a moderation in housing starts to 190,000 units in the first quarter of 2012 compared with a seasonally- adjusted annualized rate of 197,900 units in January. Housing starts should ease to 181,000 by the second quarter.

Analysts said housing prices have strayed from fundamentals but not in an extreme way, placing them as a “seven” on a scale of one to 10, with five being fairly valued and 10 being extremely overvalued.

But the national average is skewed by extremes in Toronto and Vancouver, where foreign investment has helped push up prices. Excluding these centres, Durocher rated prices as a “five” on the scale.

Doug Porter, deputy chief economist at BMO Capital Markets, agreed. “I would say aside from those two cities, there’s really little evidence whatsoever that the market has got ahead of itself,” Porter said.

“Whatever strength we’ve seen in most cities has simply been the flip side of the decline in borrowing costs. Provided we don’t get hit with an interest rate shock, then I think the market can adjust to a moderate backup in rates over time.”

Vancouver prices have already started sliding. The outlook of the half- dozen analysts who ventured a forecast on that city was for a 3 per cent drop this year and 4.8 per cent fall in 2013.