Canada's Housing Bubble

Oct 05, 2010 online.wsj.com

Ottawa (Dow Jones) -- Canadian Finance Minister Jim Flaherty said Monday the government will tighten mortgage rules "if it's necessary," but has no immediate plans to do so.

Flaherty said there has been some moderation in the Canadian housing market since mortgage rules were tightened in April to deter speculation. He said the concern always is to make sure that housing, and particularly the mortgage market, don't overheat.

"We continue to watch. If it's necessary to tighten the rules further, we will tighten them further," Flaherty told reporters after meeting with private-sector economists.

He said the government monitors consumer debt and mortgages closely, and watches housing affordability "to ensure that marginal investments are guarded against." According to the RBC Housing Affordability Measure, the average cost of owning a detached bungalow has risen over four consecutive quarters and now takes up 42.9% of a typical after-tax income.

Flaherty said the global economy is in a period of "high uncertainty" but there's significant growth in most emerging markets and also relatively small growth in the U.S. and the European Union.

"We're in a different world today and we talked about that this morning. This is not a time of booming economic growth, this is a time of modest growth and there needs to be some adjustment of expectations..." he said.

Flaherty said "one of the many variables" discussed was the potential impact of any further quantitative easing in the U.S. He would not elaborate.

He said the message from the economists was to "stay the course" and not be overly optimistic on the economy. He said Canada's fundamentals are strong and "we're on the right track" with 2010 Budget projections.

The Finance Department regularly surveys private-sector economists and uses the average for assumptions made in the federal budget and the traditional fall economic update. Flaherty said economists at the meeting assured him that average forecasts from the September survey are a "reasonable basis" to update figures in the upcoming economic update.

He said there are "deficit consequences" to limiting employment insurance premium hikes when a two-year freeze ends in January, but in the medium term "it is not a negative consequence, in fact it's positive." Flaherty had said Friday that the increase in premiums will be limited to 5 Canadian cents per C$100 insurable earnings in 2011, and to 10 Canadian cents for subsequent years. The premium rate was frozen at C$1.73 per C$100 insurable earnings to the end of 2010 as part of the government's two-year C$48 billion stimulus program.

Flaherty said the priority is to wind down stimulus on time and "gradually" return the budget back to balance over the medium term - "somewhere in the neighborhood of 2014- 2015." The government has insisted that stimulus will end as planned in March 2011.

-By Nirmala Menon, Dow Jones Newswires; 613-237-0688 end_of_the_skype_highlighting;

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