OTTAWA — Finance Minister Jim Flaherty is looking at a variety of ways to encourage Canadian households to trim their record-high debt levels, including a tightening of the rules on the lines of credit that people can take out against their homes.
It's one of several options on the table as Flaherty prepares for a year in which he expects to get a lot of practice shooting down proposals for major fiscal initiatives that would set the Harper government back in its quest to eliminate the federal deficit.
"I'm saying 'no' a lot," the finance minister told Postmedia News this week in a year-end interview at his Department of Finance office in downtown Ottawa. "This is the year for 'no.'"
Next spring's federal budget marks the end of the government's two-year economic-stimulus package, and the beginning of an era of relative spending restraint that the Conservatives say will erase the deficit, which hit a record $56 billion, by 2015-16.
But even as the Canadian economy recovers, other risks are emerging, including the unsettling growth in household debt, which has reached a record high relative to incomes. Bank of Canada governor Mark Carney recently warned the debt binge has made consumers more vulnerable to unexpected shocks, and advised them to be more prudent.
Echoing the message of thrift, Flaherty said the government continues to closely monitor the housing market, and is prepared to intervene again if necessary.
"We continue to watch carefully. If we need to tighten that market up more, we will," the finance minister said. "A lot of this demand is because of very low interest rates, so it's not surprising that some people are taking advantage of that. We want to encourage thrift. We want to encourage people in the residential mortgage world to not buy more house than they can afford."
Since the height of the U.S. subprime mortgage crisis in 2008, the Finance Department has twice raised the standards by which homebuyers qualify for government-backed mortgages. For example, the government has raised the minimum down payment required to qualify for such mortgages, and limited the amount of cash that homeowners can free up by refinancing their mortgages.
Flaherty said any tweaks would likely be along the same lines of what the government has already done. But he said he's concerned by the popularity of so-called home-equity lines of credit, which allow people to borrow money from their mortgage lender using their home as collateral. All of Canada's biggest banks offer such loans, often with flexible repayment terms.
"There's one other area that concerns me, and that is the home-equity loan market, which has grown significantly," said Flaherty, who added that the government hasn't decided if it will take further action on mortgage rules.
The market for home-equity loans, which critics have likened to using one's home as an ATM, exploded in the run-up to the U.S. housing-market collapse. Eventually, lenders curtailed their offerings of such loans, but not before the market's value mushroomed to $1.1 trillion U.S..
One finance expert said the risk of a home-equity loan bust isn't as great in Canada, because of the relative solidity of the housing market. Still, some homeowners could find themselves in a tight spot if interest rates increase faster than expected, said Louis Gagnon, a finance professor at the Queen's School of Business in Kingston, Ont.
"The fear is that people think that rates are going to remain low forever, they might just be caught by surprise," he said.
Flaherty once again predicted there won't be any big-ticket spending initiatives in the coming federal budget.
"There will be no new big spending programs. There will be no draconian cuts," the finance minister said.
Liberal leader Michael Ignatieff recently said his party would vote against the budget if the Conservatives follow through on scheduled corporate tax cuts and $16-billion plans to buy stealth fighter jets. The Conservatives need the support of at least one opposition party to pass the budget and avoid an election.
Flaherty said there could be some small adjustments in the Conservatives' short-term deficit forecasts, but the government remains on track to return to a small surplus in 2015-16. In the next five years, the government is projected to rack up a total shortfall of nearly $110 billion.
He said the uncertainty of the U.S. recovery remains the biggest risk to the Canadian economy.
"Their recovery is starting, but it's still tentative. They have a continuing massive issue with their housing market, which drags down consumer confidence and consumer demand."
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