Flaherty unveils new rules aimed at curbing soaring household debt

OTTAWA - Finance Minister Jim Flaherty has announced new mortgage regulations aimed at reducing Canadians' soaring household debt.

Flaherty has unveiled three new rules:

1) Mortgage amortization periods will be reduced to 30 years from 35 years.

2) The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent.

3) The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

The rules are aimed at encouraging responsible lending and borrowing and encouraging people to increase their home equity.

"Our measures will help improve the financial situation of households in Canada," Flaherty said.
"While interest rates are currently low by historical standards, eventually they will rise. Canadians should — and for the most part do — understand this when taking on significant debt such as the purchase of a new home."
The minister said the measures are aimed at protecting "the stability of the economy by ensuring lenders' practices are sustainable." He said that will increase the security and stability of home ownership.

"This will also increase the savings of Canadian families — savings of tens of thousands of dollars over the life of a mortgage, savings that go back in the pockets of hardworking families, where they belong."
The new rules come on the heels of a Bank of Canada announcement that Canadians' domestic debt burdens have hit record levels. The ratio of household debt to disposable income has reached 147 per cent and household debt has reached $1.4 trillion. The International Monetary Fund has called household debt the No. 1 risk to the Canadian economy.

[Source - The Canadian Press]

If you have any questions on how these rules may affect you, please feel free to call or email me.

I think these rules are good and although they may prevent some from buying a home now, they will force these people to save more money to facilitate a purchase in the future which will make them better off in the long run.

What are your thoughts on the new rules?

Canadian consumer confidence

Canadian consumers are feeling more optimistic about their finances and job prospects, but they are still shying away from making major purchases, the Conference Board of Canada said Monday.

The board’s consumer confidence index rose 0.7 points to 82.1 in June – the fourth straight monthly increase. The index – based on monthly surveys – is now up 10.6 points since March.

“Responses indicate that consumers feel increasingly confident about their current and future financial situation,” the board said. “As well, the balance of opinion on future employment prospects improved for a third consecutive month.”
The survey – conducted between June 4th and 14th – found, however, that many consumers are holding off on buying big-ticket items. “The recession has clearly hit the financial well-being of many Canadians, as negative responses still outnumber positive responses by a more than two-to-one margin,” the board said. – Financial Post

Canada's recession, likely its deepest since the Great Depression, may also be its shortest.

[Source - Bloomberg News Published: Wednesday, May 20, 2009]

Rising home and car sales, unexpected gains in building permits and employment, easing credit conditions and higher commodity prices signal Canada's slump may be nearing an end. Eight of 11 economists surveyed by Bloomberg this month predict the economy will return to growth next quarter.

"It doesn't feel quite like it's over yet, but people are breathing a little bit better," said Russ Girling, president of pipelines at TransCanada Corp., the country's biggest pipeline company, which recorded a 12% rise in revenue in the first quarter.

All but one of the country's five post-Second World War major recessions have lasted at least one year, with the shortest in 1957 at nine months, according to Philip Cross, who tracks the country's business cycles for Statistics Canada.

Canada's economy contracted at a 3.4% pace in the last quarter of 2008 and growth in the first quarter may shrink at a 7.3% rate, the Bank of Canada estimates.

The U.S. recession started in December 2007, according to the National Bureau of Economic Research, the arbiter of U.S. business cycles. Statistics Canada, which defines a major recession as a slump in which both employment and output post annual declines, has yet to date the start of Canada's recession, Cross said. The Bank of Canada has said the country entered into a recession in the fourth quarter of last year.

No Bailouts
While Canada has suffered from falling U.S. demand for exports, the country's banks have largely avoided credit losses. No government money has been given to any of Canada's 21 banks since global credit seized up in August 2007. The U.S. government oversees about US$200-billion in investments in banks through the taxpayer-funded Troubled Asset Relief Program.

Canada's housing market has also held up better than in the U.S., where prices declined 18.6% in February from a year earlier, according to the S&P/Case-Shiller index of 20 major cities. Average resale home prices in Canada dropped at less than half that pace during the same period, according to the Canadian Real Estate Association.

"We may not be in a recovery, but I think we might be in a position where it's not getting worse, where it's truly plateauing," Prime Minister Stephen Harper said in a May 8 interview, adding he'd like another "month or two" of data before coming to that conclusion.

Canada's benchmark Standard & Poor's/TSX Composite Index has posted a 50% gain in U.S. dollars since its low on March 9, compared with the 34% gain for the Standard & Poor's 500 Index over the same period.

Recession
Economists surveyed by Bloomberg this month said they expect Canadian growth to rebound at an annual pace of 0.5% in the third quarter and by 2% in the fourth quarter.

"In February, the rapid decline in demand had come to an end and by April, the rapid declines in employment had come to an end," Cross said. "Was that a temporary end or not? We don't know."

While Canada's jobless rate is at a seven-year high of 8%, the economy in April created new jobs for the first time in six months and sales of existing homes rose the most in more than five years. Credit markets are also improving. The Bank of Canada's composite index of financial market conditions is at its strongest since September.

Improved credit markets have allowed companies such as Enbridge Inc., the biggest transporter of oil to the U.S. from Canada's oil sands, to move ahead with the new debt sales to finance operations. Enbridge sold $400-million of bonds last week.

'Cross Our Fingers'
"Our approach is to watch for windows when we think there are opportunities to raise capital funds," said Richard Bird, Enbridge's chief financial officer. "This is a window and let's cross our fingers and hope that it's a trend."

A quick end to the recession would raise pressure on the Bank of Canada, led by Governor Mark Carney, to say it no longer plans to keep its benchmark lending rate near zero through June 2010. The country's central bank projected last month the economy will contract four consecutive quarters, bringing it closer to the average length of the last five major recessions.
"The Bank of Canada will have to revisit their own view of what they will do with interest rates," said Paul-Andre Pinsonnault, an economist at National Bank Financial. "GDP will be stronger than what they are looking for."

A quick end to the recession doesn't guarantee a strong rebound. DBRS Ltd., a rating company, predicts an L-shaped recovery for Canada, which it defines as "a prolonged period of flat or slowly improving performance."

"The earliest I can see an improvement is in October or November," said Jacques Plante, chief financial officer of Hart Stores Inc., a discount retailer. "I can't imagine we'll have anything positive this summer."