TIGHTER RULES ON HOME BUYING

FEARS OVER HEALTH OF HOUSING SECTOR PROMPT LIBERALS TO CONSIDER RAISING MINIMUM DOWN PAYMENTS IN HOT MARKETS

The weather may be unseasonably balmy in Ottawa but, nationally, the economic headwinds assail the Liberals and threaten to blow the new government off course.

No sooner had Prime Minister Justin Trudeau backed away from the campaign promise to hold the deficit to $10 billion a year — this is now a “goal,” rather than a firm commitment — than fears have emerged about the health of the nation’s housing market.

Concerns about a downturn in high-priced markets like Toronto and Vancouver have persuaded the Liberals to take action.

As my colleague Garry Marr wrote earlier this month, industry sources suggest the Department of Finance wants to increase the minimum down payment in hot markets. The speculation is that prospective homeowners of high-priced properties — say more than $700,000 — in such high-priced markets would have to pony up 10 per cent of the asking price as a down payment, instead of the current five per cent.

Conservative sources say that Finance was always very keen to tighten the terms for government-backed loans when they were in office but their commitment to home ownership persuaded them to hold off, even as they tightened rules on mortgage amortization lengths to 25 years from 40.

Liberal sources suggest the new government has been persuaded that it has to act — before interest rates start to rise.

The Liberal platform said the party would review escalating home prices in Toronto and Vancouver “and consider all policy tools that could keep home ownership within reach for more Canadians.” While this may have sounded as if the Liberals wanted to relax lending conditions, recent evidence has convinced them there is a need for regulatory tightening.

A new report by the C.D. Howe Institute (an organization the new finance minister, Bill Morneau, used to chair) quantifies the problem.

Authors Craig Alexander and Paul Jacobson refer to “pockets of risk” in the housing market in their paper, Mortgaged to the Hilt.

The paper suggests the ratio of the value of mortgages in primary dwellings has jumped to 204 per cent of after-tax income in 2012, from 144 per cent in 1999.

It also suggests that one in five homeowners have less than $5,000 in financial assets to draw upon in response to lower income or higher debt servicing costs. One in 10 has less than $1,500 in available assets.

Higher interest rates are coming and the data suggests many Canadians don’t have the financial resources to cope.

The authors suggest that policy responses should not be “heavy handed” and should be targeted on highpriced markets.

It’s not clear exactly what course the Liberals will choose. Alternative policy options could be lifting credit scores.

But the industry is anticipating an increase in down payments as a way to stop first-time buyers borrowing money they can’t afford to repay. Homes valued at less than $500,000 would likely be exempt from the 10 per cent rate and require just a five per cent down payment.

The change would affect anyone with a loan backed by mortgage default insurance, required on all homes with less than a 20 per cent down payment.

The prospect of a downturn in the housing market adds to the finance minister’s headaches. The deficit is growing, the oil price is still falling and now CIBC World Markets is predicting the unemployment rate is set to rise.

As he prepares his March budget, Morneau is going to be obliged to assume a Dr. No persona — disappointing the activists in the cabinet who will demand money for their particular causes.

It is encouraging that Morneau is prepared to make the hard decisions that are necessary, even if they are at odds with the party’s stated position.

But, following the deviations on Syrian refugees and a “revenue neutral” tax cut, it suggests the party platform should be nominated for one of those end of year top fiction lists.