Morneau Sees Brief Impact, Longer Gain From Housing Measures

  • Finance Minister seeks to stabilize Canada real estate market
  • Economists estimate new rules will crimp GDP as much as 0.5%

Canadian Finance Minister Bill Morneau acknowledged his housing measures could have some temporary negative impact on the economy that he expects will be more than offset by long-term benefits from a more stable real estate market.

Morneau, speaking in an interview with Bloomberg TV Canada’s Amanda Lang, said he took action to make it more difficult for some home buyers to get mortgages because the government was worried about rising household debt levels and risks to the Toronto and Vancouver markets.

“Of course we recognize there are economic impacts with everything we do,” Morneau said, citing a potential curb in housing investment. “We want to make sure the housing market is stable for the long term.”

While most Canadian banks are still evaluating the impact of housing measures, some economists have begun to cut already sluggish growth estimates, with some forecasts placing the potential drag at as much as 0.5 percent of gross domestic product.

Morneau said it’s too early to estimate any economic costs given it’s not clear how home buyers will actually adjust, adding his intention wasn’t to “cool” the market.

‘Save Longer’

“The measures we put in place will have some people who are buying their house to consider whether they should save a little longer, whether the house they are looking at purchasing is exactly right for them based on their income,” he said. “And that’s the intent of it.”

The moves include a more stringent stress test for home buyers, stricter eligibility criteria for insured loans and closing a tax loophole that allowed non-residents to sell their principal homes tax-free. Morneau is also beginning consultations on a risk sharing proposal that would require the industry to shoulder some of the burden of mortgage defaults.

Bank executives have cautioned that any moves on risk sharing should be well thought out. What’s needed is a “consultative period” with stakeholders so that “Canada’s financial institutions remain competitive and there is stability in the system,” Canadian Imperial Bank of Commerce Chief Executive Officer Victor Dodig said Wednesday in an interview in Ottawa during a conference hosted by the Public Policy Forum.

Less Revenue

On risk sharing, Morneau noted that outside observers have found the arrangement where the government takes on all the risk as “being unusual” and added that he hasn’t concluded on “what we want to achieve” on the matter.

“We want to make sure the risk in the market is something that we’re all comfortable with,” Morneau said.

The Finance Minister also hinted he’s facing a weaker revenue outlook, saying he’s already budgeted a C$6 billion ($4.5 billion) risk cushion for slower growth. He cited a slower rebound in the U.S., “rebalancing” in China and wildfires in Alberta earlier this year. At the same time, Morneau said the government is taking steps to bolster confidence -- including a decision to approve a C$36 billion natural gas project in British Columbia -- and he expects new child benefit spending and infrastructure to give the economy a boost soon.

“The challenges are big but I think the measures we’ve taken will start to have an impact really now,” he said.

The finance department is keeping the same fiscal multipliers it used in its March budget, when it estimated its measures will boost output by 0.5 percent this year and 1 percent next year.

Morneau also said taking austerity measures now would put the economy in an even tougher spot, and that the government will maintain its “fiscal anchors.”

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