OTTAWA • The federal government and some of the country’s leading economists remain worried about Canada’s housing market and rising household debt, and are cautioning Canadians against borrowing too much.
However, they are more optimistic about the overall state of the Canadian economy than they were just last fall, and now project stronger-than-expected economic growth in 2012.
Finance Minister Jim Flaherty met Monday with 13 private-sector economists for his traditional pre-budget consultation to get their assessment of the economy as Ottawa prepares to deliver the federal budget on March 29.
Mr. Flaherty and a handful of the economists said they continue to be concerned about household debt levels in Canada and a somewhat overheated housing market — especially on condominiums. The Minister was also cautioned about cutting more than $4-billion in annual spending that the government first identified last year.
Some of the big banks are suggesting the federal government also consider implementing “measured actions,” such as reducing the maximum amortization period for mortgages back to 25 years and increasing the minimum down payment, possibly to 10%.
“There has been some moderation in the housing market. I remain concerned about the condo market, quite frankly,” Mr. Flaherty told reporters after his one-hour meeting in Ottawa.
“I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because (interest) rates will go up some day.”
The Minister, however, noted there’s a “divergence” in opinion among the economists, as some expressed more concern than others about the state of the housing market.
Avery Shenfeld, chief economist at CIBC World Markets, echoed some of Mr. Flaherty’s worries and said that while there are signs the housing market is cooling off, there’s still cause for concern.
“There’s a general feeling that, more than just the condo market, the Canadian housing market is starting to get a little bit overdone in terms of price momentum,” Mr. Shenfeld said.
He noted the Canadian economy in 2012 is likely to expand a few decimal points more than the 2.1% growth in real gross domestic product that was predicted in November’s fall economic update.
“It’s fair to say that some of the risks we were worried about last year don’t seem quite as shocking as we go into the current year,” Mr. Shenfeld said.
The federal government bases its budget and economic projections on the average forecasts of private-sector economists it regularly consults. The economists said they’re waiting a few more days for the most recent GDP figures to trickle in before releasing an updated average.
Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said he also is worried about the state of the Canadian housing market and would like the government to consider reducing the maximum amortization period to the traditional 25 years from the current 30 years.
Increasing the minimum down payment to 10% from the current 5% is another option, he said, but one that must be carefully considered.
“I do believe that there is some scope to take some further measured actions. I am concerned about the condo market quite a bit,” Mr. Burleton said.
Reducing the maximum amortization to the traditional 25 years wouldn’t generate any drastically negative impacts, he said. The government had increased the maximum period to 40 years, but slowly ratcheted it back over the past few years to the current 30 years.
Mr. Burleton also noted borrowing trends have picked up in recent months after a cooling-down period, and is worried the uptick will continue.
Douglas Porter, deputy chief economist at BMO Capital Markets, cautioned the government against searching for more than the $4-billion in annual cuts the Conservatives identified in last year’s budget.
The Harper government’s program review is searching for a minimum $4-billion — and up to $8-billion — in annual savings over the next few years, but Mr. Porter said the government should tread carefully.
“I would not advocate for the federal government to ramp up the pace” of cuts beyond what was already announced in last year’s budget, Mr. Porter said, adding federal finances are now in better shape.
“There is not a push from the financial markets for the federal government to do any more than what’s already scheduled.”
However, Mr. Porter is not as skeptical of the Canadian housing situation, saying the markets remain fairly well-balanced across the country.
“I don’t get the impression that the housing market has been particularly overdone,” he said.