Risks from housing markets' strength contained: Bank of Canada

By Leah Schnurr KINGSTON, Ontario (Reuters) - The risks that booming housing markets pose to Canada and other similar economies are being well managed by credible and effective macroprudential policies, Bank of Canada Deputy Governor Lawrence Schembri said on Tuesday. Schembri, who looked at Canada, Australia, Norway, Sweden and New Zealand, said low interest rates in the wake of the 2008 recession had helped boost the housing sector. The Bank of Canada and the federal government have long fretted that the hot housing market and record levels of personal indebtedness could spark a crisis in Canada, especially if interest rates rise. "The resulting strength in the housing market has increased household imbalances, but the risks stemming from these vulnerabilities have been well managed by complementary macroprudential policies," he said in a speech. "The experience in these countries therefore suggests that macroprudential policies that address structural weaknesses in the regulatory framework are best suited for mitigating such financial vulnerabilities," he continued. In Canada, authorities tightened mortgage rules four times from 2008 to 2012, cutting the maximum amortization of insured mortgages and boosting the amount that people had to put down as a deposit for a new house. "Recent evidence suggests that these measures have resulted in higher average credit scores, which have improved the quality of mortgage borrowing," said Schembri. The central bank said on July 15 that housing activity should moderate in 2015 and stabilize over the next two years, but persistent strength could exacerbate household sector imbalances and increase the likelihood and potential severity of a correction later on. The bank said at the time it "continues to anticipate a constructive evolution in the housing market". Schembri said the bank was keeping a close eye on the housing market. In its Financial System Review in June, the bank said higher house prices were associated with greater levels of household debt and also said homeowners could land in trouble if their properties did not gain value as much as expected. "The likely trigger for both vulnerabilities would be a major global shock that generated a sharp increase in unemployment and possibly in interest rates as well," said Schembri. (Writing by David Ljunggren; Editing by James Dalgleish)