Canada is raising minimum down payments on some government-insured mortgages, a move aimed at curbing the risk of a housing crash in Toronto and Vancouver where high prices are leaving some families at risk from heavy debt loads.

Finance Minister Bill Morneau announced the plans on Friday morning in Ottawa. The required down payment on homes worth at least $500,000 will rise to 10 per cent from 5% starting Feb. 15, 2016 — however the higher threshold will only apply to the portion in excess of that mark. That means the minimum down payment for a home worth up to $1 million would be 7.5%.

“The government’s role in housing is to set and maintain a framework that is equitable, stable and sustainable,” Morneau said in a statement. “The actions taken today prudently address emerging vulnerabilities in certain housing markets while not overburdening other regions.”

Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said linking down payments to price “should do the trick” to cool the two hottest and most expensive real estate markets in the country: Toronto and Vancouver.

While the new policy is expected to have an impact in those markets, “a closer look suggests that the impact will be smaller than perceived,” Tal said in a note issued Friday morning just ahead of the announcement from the Ministry of Finance.

Years of surging prices, a condo construction boom and low borrowing costs have drawn warnings from the International Monetary Fund and Canada’s own housing agency. About 11% of households have mortgage debt of at least 500 per cent of disposable income, according to the CD Howe research group.

Morneau has said housing was one of the first briefings he sought after his Liberal Party won an Oct. 19 election, and people familiar with the discussions said the department had pushed for higher down payments on more expensive homes under the previous government.

Setting down payment rules by a home’s price allows the government to target the hottest areas without damaging slower markets, such as Calgary where consumers are struggling as energy companies cancel projects and fire workers.

Financial Risks
The risk of overheating is greater in Vancouver where the average price for a detached home has jumped to almost $1.6 million, and in Toronto where a detached home in Toronto averages more than $1 million.
Canada’s central bank considers imbalances in consumer finances one of the biggest risks to financial stability, and Governor Stephen Poloz has said other policy makers must take the lead in constraining the risks. Poloz has cut his trend-setting overnight interest rate to 0.5%, saying that stimulus is needed to sustain an economic recovery threatened by a drop in crude oil prices.
Besides people living in the most expensive markets, young families are the most at risk, according to a CD Howe report this week. Those borrowers may have never seen an era of rising interest rates, which may be coming now as the US Federal Reserve signals it’s about to tighten, which can have an impact on global borrowing costs.

Canada Tightens Mortgage Rules to Help Cool Blistering Toronto, Vancouver Housing Markets by Theophilos Argitis & Greg Quinn | Bloomberg News | Financial Post