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The story behind Jim Flaherty’s recent announcement:
The looming damage from Europe’s banking crisis was front and centre Thursday as Finance Minister Jim Flaherty and Mark Carney, the central bank governor, went public in a joint campaign to head off runaway inflation in the overheated housing sector.
“There’s grave concern about the economic recovery in Europe,” Flaherty told reporters after announcing measures to take some of the steam out of Canada’s mortgage market. “I’m concerned, obviously, that we may get a shock from Europe.”
It was a tacit admission the economy is too iffy to allow the Bank of Canada to raise interest rates, which would drive up borrowing costs and reduce the risk of too high inflation in real estate.
The extent of the danger from Europe’s mess was evident everywhere Thursday. Global stocks fell more than 1 percent and Brent crude hit its lowest point since December 2010 following data showing manufacturing in three of the world’s biggest economies, China, Europe and U.S., had slowed further.
Despite the U.S. Federal Reserve’s promise this week to extend its stimulative “Operation Twist” program, U.S. stock indexes suffered their worst day Thursday since June 1. Gold was on track for its biggest decline in more than three months on global economic worries, and the TSX slumped 350 points, its biggest one-day drop since November.
“The genesis is Europe and it’s starting to flow through everything now. Business has slowed down,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
The decision on mortgage-lending follows this week’s G20 summit in Mexico, where Flaherty, Carney and Prime Minister Stephen Harper spent two days grappling with the European Union’s long-stalled effort to overcome the alarming financial breakdown on the continent.
“We just came back from the G20 meeting of leaders and finance ministers and the reality is that the European situation is very challenging, to put it mildly,” Flaherty said. “So my job is to look at our own country and look at the residential real estate market and make the best judgment that we can.”
Earlier this year, Carney warned Canadians the central bank was looking to push up their borrowing costs to head off a burst of price inflation. But a few weeks ago he changed his tone, suggesting as long as Europe’s problems continue to undermine the global recovery, he would have little choice but to keep the bank’s trend-setting interest rate at or near the current 1 per cent to spur economic expansion at home.
Still, Carney and Flaherty are worried historically low interest rates are enticing Canadians to take on dangerously high levels of debt, particularly in home-buying. So the Harper government is trying to offset the negative impact of the central bank’s pro-growth low-interest rate policy by making it harder for Canadians to take out mortgages.
In a speech in Halifax, Carney chimed in, “Federal authorities have taken additional prudent and timely measures to support the long-term stability of the Canadian housing market, and mitigate the risk of financial excesses.
“Our economy cannot depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” the bank governor pointed out.
He noted that “Europe is now stagnating—its (annual economic output) is still more than 2 per cent below its pre-crisis peak.”
Flaherty said he acted to toughen mortgage rules for the fourth time in six years to slow the growth of a real estate bubble. He noted that the bursting of the U.S. housing bubble caused long-term damage to the American economy.
He singled out the condominium market in Toronto as the most troubling hot spot. Buyers should conduct themselves prudently he said. “Some calming of the market is desirable.”
The government is tightening mortgages by reducing the maximum amortization for a government-insured mortgage to 25 years from 30 years.
It is also lowering the maximum amount Canadians can borrow when refinancing a property to 80 per cent from 85 per cent of the value of their homes. Flaherty has complained in the past about people using their homes at ATM machines.
And government-backed mortgage insurance will no longer be available for homes with a purchase price of more than $1 million.
With files from Reuters and Canadian Press