The recent changes in the lending rules in Canada make it harder to borrow money to buy a house. (1)(2)(3) The maximum amortization period has been shortened to 25 years from 30 years, the minimum payments will be higher, and the limit of refinancing goes up from 80% to 85%.(1) The concern seems to be that the housing market is too hot and it needs to be cooled down. (1)(2) This is the fourth time since 2008 that the mortgage rules have been tightened, and yet the housing market continues to grow. (3) If something is tried multiple times and there is no result, why keep doing it? The elephant in the room here is interest rates. If you want to cool off the housing market, then raising interest rates would accomplish this. Real estate is the most sensitive sector to interest rate changes due to the debt attached to the purchase. The other peculiar thing with this announcement is that the mortgage rules were made more lenient and are now being contracted to what they were about 5 years ago.(3) Is this an admission of a policy error, or is this a genuine change in direction due to economic conditions? Will these rule changes matter when a large section if buyers are coming from overseas and can access money outside of Canada? (4)(5)
With respect to that elephant, why aren't interest rates being raised? There was concern voiced about the Canadian dollar rising too quickly, and yet it has stayed very close to the US dollar over the last few years. (6) There is the concern that raising interest rates would make existing debt more expensive. What about regulating the other forms of debt that are more expensive than mortgages: credit cards or lines of credit? The rest of the world keeps lowering their interest rates, so Canada must stay in line to avoid a relative gain of the currency, or large outflows coming into Canada from the rest of the world. Canada was part of the co-ordinated central bank effort to prop up the world economy in 2011.(7) Can it be assumed that there is an implicit interest rate policy agreement between the Bank of Canada and the central banks of the other 5 regions, thereby meaning that Canadian interest rates will mirror those of the western world? Time will tell if these questions will get answered, but the reasons cited for the recent mortgage rule changes are a bit of a puzzle.
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