Canadian Finance Minister Jim Flaherty’s efforts to avert a housing bubble are hastening the end of a six-year streak of outperforming the U.S. economy.
Changes implemented Tuesday include shortening the maximum length of government-insured mortgages to 25 years from 30 years to quell demand for new homes and curb record household borrowing that Flaherty said has become a greater risk to the economy than slowing growth.
The rule changes make it harder for some buyers to qualify for mortgages. Ebbing demand for homes removes one more driver from the world’s 10th largest economy, said Douglas Porter, deputy chief economist at Bank of Montreal. Residential construction was the fastest expanding segment in the first quarter, responsible for almost half of Canada’s 1.9% growth as consumer and government spending slowed.
Canada’s economy is projected to grow by 2.1% this year, according to economists surveyed by Bloomberg, down from a pace of 2.4% in 2011 and 3.2% in 2010. U.S. growth will accelerate to 2.2% from 1.7% last year, economists project, marking the first time since 2005 Canada has lagged its biggest trading partner. Canada’s average growth of 0.9% since 2008 topped the Group of Seven.
The new mortgage rules, coupled with steps taken by the country’s banking regulator to tighten mortgage lending standards, have the same impact in the real estate market as a 1.5 to 2% age-point increase in interest rates, David Tulk, chief Canada macro strategist at TD Securities in Toronto, estimated. The changes will reduce growth by 0.1 percentage points this year and 0.2 points in 2013, Tulk said.
Slowing household spending will lessen the risks posed by an overreliance on household debt to the country’s banking system, which was judged the world’s soundest by Geneva-based World Economic Forum for four straight years. Moody’s Investors Service cited the changes as being positive for banks such as Canadian Imperial Bank of Commerce and Toronto-Dominion Bank.
Household debt relative to disposable income rose to a record 154.3% in the first quarter, with Canadian debt levels surpassing those in the U.S. and the U.K.
Canada relied on household spending and government stimulus to emerge from recession in 2009, with business spending and residential construction sustaining the recovery over the past two years. The G-7’s soundest fiscal record allowed Harper and his provincial counterparts to boost government spending to more than one-quarter of the economy for the first time in 15 years.
A financial system that didn’t experience bank failures continued to lend at historically low interest rates after the recession, lifting the stock of home mortgages to a record and boosting consumer spending as a share of output to the highest in decades.
The recovery allowed Prime Minister Stephen Harper to boast in his 2011 election campaign that Canada was the "closest thing the world has to an island of security and stability." That election gave Canada’s Conservatives their first electoral majority since 1988.
The economy also made global investors take notice. The country received $326 billion in net capital flows in the three years between 2009 and 2011, more than the previous 15 years combined, while the Canadian dollar gained 38% between March 2009 and July 2011 against its U.S. counterpart
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