New Canada mortgage rules won't deflate market

By John McCrank - Analysis

TORONTO (Reuters) - Canada's decision to tighten standards on mortgages it guarantees won't help a housing market that's already slowing down, but the new restrictions are unlikely to trigger a U.S.-style housing meltdown.

The Finance Department on Wednesday said it was cutting the maximum amortization period for government-backed mortgages to 35 years from 40 years, and require buyers to make downpayments of at least 5 percent of the purchase price.

Even before the tighter rules, national home sales were expected to drop 11.5 percent in 2008, according to an industry group, after surging at a double-digit pace since 2002.

The long stretch of sizzling growth has put home prices out of the reach of many prospective buyers. Waning consumer confidence is also taking a toll on the Canadian market, economists say.

Against that backdrop, the new rules will only affect those buyers at the margins of the market, said Doug Porter, deputy chief economist at BMO Capital Markets,

"It'll take some steam out of the market and overall we're going to see fewer people able to afford houses," he said.

"Longer-term, it should be relatively neutral to the market," Porter said. He pointed out that the new rules may lower demand immediately, but that could lead to reduced home prices, which may draw other prospective buyers into the market.

In May, the Canadian Real Estate Association said the market would remain strong by historical standards even though it was headed lower.