By Louise Egan

OTTAWA — Canada’s government will make it tougher for many homebuyers to get mortgages this year as it grapples with an overheated property market, according to analysts in a Reuters poll, who also ruled out the prospect that prices could suddenly crash.

Ten of 14 economists and strategists surveyed last week in Reuters’ first poll on the Canadian housing sector answered “yes” when asked if they thought Ottawa would tighten mortgage rules within the next 12 months.

They expect home prices to climb just 0.1% in the year to December 2012, and the same in 2013. That is down from a 0.9% year-on-year increase in December 2011.

If Finance Minister Jim Flaherty tightens requirements for government-backed insured mortgages it would be his fourth intervention in the real estate market since 2008.

Flaherty could raise the minimum down payment to buy a home from the current 5% or reduce the maximum amortization period from 30 years.

Any move would likely come before the prime spring real estate season, analysts said. “Sometime between now and the next budget,” said Benoit Durocher, senior economist at Desjardins in Montreal, on the timing of such a move.

The budget is expected in late March.

The poll respondents see the housing market as moderately overvalued, particularly in Toronto and Vancouver.

“There is some genuine concern that the housing market and households have been overstretched,” said Mazen Issa, economist at TD Securities.

“But in the absence of several triggers for a housing market decline, which are not likely to be forthcoming until at least the middle of next year, the underlying theme is of gradual moderation,” he said.

Possible triggers would be a rise in mortgage rates or a sharp rise in unemployment.

Canada’s robust housing market helped pull the economy out of the 2008 recession. Prices dipped briefly during the downturn, but quickly resumed the climb that characterized the previous decade.

But that effervescence is now a headache for policymakers, as historically low interest rates tempt more and more people to take out mortgages for increasingly unaffordable homes.

Household debt levels are approaching those in the United States before the 2008-09 housing meltdown there. Canada’s debt-to-income ratio hit a record 153% last year and is expected to rise.

The Bank of Canada, which has fanned the flames by holding its benchmark lending rate at 1% for an unprecedented 17 months, has made it clear that rates are likely to stay unchanged for at least this year. Of the nine forecasters who answered a question on how far prices would fall before stabilizing, the median decline was 5%, with four predicting price stabilizing beyond 2013.

The economists see a moderation in housing starts to 190,000 units in the first quarter of 2012 compared with a seasonally-adjusted annualized rate of 197,900 units in January. Housing starts should ease to 181,000 by the second quarter.

Analysts said housing prices have strayed from fundamentals but not in an extreme way, placing them as a “seven” on a scale of one to 10, with five being fairly valued and 10 being extremely overvalued.

But the national average is skewed by extremes in Toronto and Vancouver, where foreign investment has helped push up prices. Excluding these centers, Durocher rated prices as a “five” on the scale.

Doug Porter, deputy chief economist at BMO Capital Markets, agreed. “I would say aside from those two cities, there’s really little evidence whatsoever that the market has gotten ahead of itself,” Porter said. “Whatever strength we’ve seen in most cities has simply been the flip side of the decline in borrowing costs. Provided we don’t get hit with an interest rate shock, then I think the market can adjust to a moderate back-up in rates over time.”

Vancouver prices have already started sliding. The outlook of the half-dozen analysts who ventured a forecast on that city was for a 3% drop this year and 4.8% fall in 2013.

In Toronto, where the activity ramped up later, prices are seen edging up 0.3% this year before falling 2% next year.

© Thomson Reuters 2012

MONTREAL — Consumer credit company Equifax uncovered roughly $400-million worth of mortgage fraud in Canada last year, an “eyeopening” number industry experts estimate represents only a fraction of the cheating taking place in the country’s real estate market.

Atlanta-based Equifax says many financial institutions are tightening lending and, as a result, deceit in the property market is rising. A report the company released Tuesday says two-thirds of all the fraud it sniffed out last year was related to real estate.

“Mortgages are the biggest bang for the buck,” said John Russo, vice-president and legal counsel for Equifax Canada Inc. “So when credit gets tougher to get, that leads to more people falsifying documents, giving false pay stubs, inflating their income, kind of fudging things to get a home.”

The $400-million in mortgage fraud represents only a sliver of the roughly $1-trillion in total residential mortgage credit outstanding at the moment in Canada. But it rose sharply in 2011 from 2010 in dollar terms, increasing 150%, Equifax data suggest.

The figure is “eye-opening,” Mr. Russo says, because that’s just the amount Equifax flushed out on its own for its clients. “There’s a lot more out there that just goes under the radar and is not seen and not caught.”

Often tracking strong housing markets, mortgage fraud occurs nationally but is more concentrated in large urban areas in Quebec, Ontario, Albert and B.C., says the Criminal Intelligence Service Canada, a federal agency that shares intelligence between police forces. Numerous criminal groups across Canada are involved in a wide range of mortgage frauds at varying levels, the CISC says, sometimes with the help of industry insiders such as property agents, mortgage brokers and lawyers.

One growing trend is people setting up fictitious identities, building up credit for those fake people and then using the credit to borrow. Equifax says five years ago it had identified 300 such fictitious identities in its national database. Now there are more than 2,500.

Using mortgage fraud to further other criminal activity is also common. Criminals are buying properties to open marijuana growing operations, to trade drugs and to launder money.

An increasing number are getting caught and there’s been a dramatic increase in criminal and civil forfeiture cases as a result, said Andrew Bury, a lawyer specializing in loan security enforcement at Gowling Lafleur Henderson LLP in Vancouver.

“They’re grabbing these properties left, right and centre. And over and over again they’re crashing into the mortgage companies, the banks, [which are saying] ‘Wait a second, we have a mortgage on that property.’ “

Lenders are losing big sums while governments reap the re-wards of the seizures, Mr. Bury said.

But the bulk of mortgage swindling still involves ordinary people lying to obtain mortgages larger than their income can support, Equifax said. They’re living in homes that are simply too rich for them. Says Mr. Russo: “No matter how small or big the lie, it’s still mortgage fraud.”

It sometimes takes years for fraud to come to light, notes Toronto forensic accountant Al Rosen. He believes controls in the banking system remain inadequate.

“I see all sorts of situations where the appraised value of [properties] is just laughable. And some of these are not checked out very well,” he says. “Because the only thing that really counts is: What can you sell that property for?”

Canada’s highest-profile mortgage fraud to date is perhaps the case of Martin Wirick, a Vancouver lawyer sentenced to seven years in prison in 2009 for fraud and forgery in an elaborate scheme covering 107 separate real estate transactions conducted on behalf of his client, real estate developer Tarsem Singh Gill.

The scheme was so huge that the Law Society of B.C. raised special contributions from its lawyer members to compensate the victims. As of 2009, it had paid out $38.4-million for the Wirick fraud alone. Over a 40-year period before that, the society’s compensation fund disbursed a total of $52-million for all cases of lawyer misappropriation.

The numbers are staggering.

At the end of last year the Canadian banks had $494.4-billion of insured mortgages on their books, guaranteed by the Canada Mortgage and Housing Corp.

Another piece of telling data: As of the end of September the CMHC had guarantees on $541-billion of outstanding home loans — roughly equivalent to the Canadian federal debt and just shy of its government mandated $600-billion cap.

The sudden jump in demand for so-called “bulk insurance” on securitized home loans took even the CMHC by surprise. It acknowledged last last month that due to “an unexpected level of requests” it is establishing “an allocation process” (aka: sharp reduction) for big lenders so it can keep doling out insurance to average Canadians.

Meanwhile, the government led by Stephen Harper, which is deeply worried about runaway consumer debt, is said to also be leaning on the CMHC to curtail bulk insurance.

“There has been increasing speculation that upcoming legislation will not permit the use of CMHC insured mortgages as collateral,” said BMO Capital Markets analyst George Lazarevski.

Whether such a move will have the desired impact remains to be seen but it’s further evidence of the dilemma the government finds itself in as it struggles to rein in consumer borrowing without destabilizing an already frothy housing market.

The good news is that the Canadian real estate prices appear to have stabilized, according to the Canadian Real Estate Association.

In a report released on Wednesday, CREA said average prices in January were up less than 2% over the same period last year, with sales down 4.5% compared to December, the biggest monthly decline in 18 months. The findings suggest that the market may be headed for a soft landing, though experts say it’s still too early to say.

Home buyers who can’t put up at least 20% of the cost of the house are required to take out insurance. Banks can also take out bulk insurance on mortgage pools, a key step before packaging up the loans into securities for sale to investors.

Though there are a handful of private sector insurers, the CMHC is by far the dominant player. It also backstops 90% of the private sector guarantees.

As a Crown corp., the CMHC is an arm of the federal government, which is why bonds backed by CMHC insured mortgages can carry a higher credit rating than the institution that issued them.

This means banks are able to raise funding almost as cheaply as the federal government — an enormous competitive advantage at a time of rock bottom interest rates, when many foreign lenders are virtually shut out of funding markets.

Not surprisingly, Canadian banks are big fans of bonds backed by insured mortgages, selling a record $24.7-billion of covered bonds in 2011, up from $17.3-billion in 2010 and $2.8-billion in 2007, the year prior to the financial crisis.

Ottawa increased the mortgage insurance cap to $300-billion from $250-billion in 2004. It was boosted again in 2007 to $350-billion, and then to $450-billion in 2008. In 2009 it was pushed up to its current limit of $600-billion.

Part of the reason Ottawa has been raising the cap was to enable players to access funding in the wake of the financial crisis that began in 2008. While that storm is long over, the banks’ appetite has been undiminished.

Some critics worry that lenders are more focused on creating and selling covered bonds than on the ability of borrowers to meet their obligations on the underlying mortgages.

Industry insiders speculate that the government may respond by prohibiting the used of CMHC-insured mortgages as collateral for covered bonds, according to Mr. Lazarevski.

Even if Ottawa takes that step it still doesn’t solve the bigger problem with consumer debt.

The root of the issue is that banks are public companies — with demanding shareholders — designed to pursue profit, and that’s exactly what they’re doing.

“As long as you’ve got a free, open economy, there’s really not much the government can do,” said Lawrence Booth, a professor at the University of Toronto’s Rotman School of Management.

The government has tightened mortgage rules several times, but when interest rates across much of the developed world are close to zero such strategies will only go so far.

“The fact is, what can you do with the banks?” asked Mr. Booth. “The banks are in business to make money. The Bank of Montreal  lowered their five-year rate [a while back]. All the banks had to respond otherwise they lose business. On the one hand this is good to help the economy. On the other hand [Bank of Canada Governor] Mark Carney is dead worried about the increase in household indebtedness.”

Canadian household debt to income is already sitting at a record 153%, greater in Canada than in the U.S. or Britain.

Finance Minister Jim Flaherty has tightened mortgage lending rules in several ways, but with limited effect as consumer debt held by the banks continues to grow at around 6%, well ahead of GDP.

The worry is that a spike in unemployment or interest rates could trigger a wave of defaults that would ripple through the broader economy. In a worst-case scenario, a major real estate correction could overwhelm the CMHC, leaving taxpayers on the hook.

“Of course taxpayers should be concerned,” said Finn Poschmann, vice president of the C.D. Howe Institute, a Toronto-based think tank. “You’ve got a situation where a big portion of the assets held by the banks are comprised of loans guaranteed by the federal government, which enables the banks to raise extraordinarily low cost capital. All the incentives line up.”

John Reucasse, who covers banks for BMO Capital markets, pointed out in a note to clients last month that the sector’s reliance on CMHC insurance has “increased significantly” and he warns that “should the CMHC ever require capital from the federal government… we expect banks could face higher taxes and higher premiums to fund losses.”

Outstanding mortgage debt stood at a record $1.1-trillion at the end of 2011, nearly triple what it was a decade ago, with most of the growth taking place since 2007.

About 50% of mortgage loans held by the banks are covered by the CMHC, representing about 22% of the Canadian dollar assets, according to the C.D. Howe Institute.

“The system is working the way it’s supposed to,” said another analyst. “These are public policies designed to support the financial system.”

The result is we have strong, profitable banks that are widely held.

“People have got to start thinking about their own ownership stake in the banks,” he said. “Look at any equity mutual fund, banks all in there, Canadian consumers have got to recognize they are all owners.”

Sales of existing homes kicked off the year with the largest decline in almost 18 months, something the real estate industry says is to be expected as the market moderates.

The Canadian Real Estate Association said January sales dropped by 4.5% from December on a seasonally adjusted basis, the first monthly decline since August 2011 and the largest monthly decline since July 2010.

Price increases are also beginning to shrink with the average Canadian home selling for $348,178 in January, a 1.2% increase from a year ago.

“The national housing market is stabilizing and remains well balanced,” said Gary Morse, president of CREA. “That said, forecasts for economic and job growth going forward vary widely for different parts of the country, suggesting a possible continuation of a softening trend in some markets, as well as the potential that demand will pick up based on strong fundamentals in others.”

Gregory Klump, chief economist with CREA, warned that year over year price comparisons could become negative as they are impacted by what happened in the Vancouver market in the first half of 2011. “At the time, high-end home sales in Vancouver’s priciest neighbourhoods surged to all-time record levels, which skewed the national average price upward considerably,” he said.

Phil Soper, chief executive of Royal LePage Real Estate Services, noted January 2012 sales were still up 4% from a year ago and in-line with his expectations for the market. “I think if we step back and look at the numbers, they were impacted by the lack of inventory in the Toronto market, our largest,” said Mr. Soper, adding he does expect both prices and sales to cool in 2012. “The pricing we are seeing is in line with a 2.8% increase we are expecting for 2012.”

He says while a crash is unlikely, consumers are going to have get used to a moderate housing market where prices are not in the double-digit year-over year range. “There aren’t any more people to pull into transactions. The stimulative impact of interest rates can pull some people into the market but not some kid out of college who doesn’t have a job yet,” said Mr. Soper.

Others in the industry maintain the giant collapse that has been forecast for the last four or five years is not coming and certainly not to the degree housing values dropped in the United States.

Gerry Solway, chief executive of Home Capital Group, thinks Canadians have been convinced of a crash because of the information that flows north from the U.S.

“I think there has been a great deal of attention by people who look at the housing market from the U.S. perspective, it went down so it’s gotta go down in Canada. It doesn’t,” said Mr. Solway whose company reported adjusted basic earnings up 30.6% in 2011 from a year earlier. “I very much agree with what [Canada Mortgage and Housing Corporation] said, that levels will stay close to last year.”

CMHC said the combination of low mortgage rates and a moderate expansion in the Canadian economy should keep new home construction and existing home sales at about the same level in 2012 as 2011. The Crown corporation even sees a 2.7% price increase for this year.

Adrienne Warren, an economist with Bank of Nova Scotia, agrees with the assessment the market will be flat in 2012. “Despite the lure of historically low interest rates, the softening trend in employment growth over the past six month combined with tightening in mortgage rules last spring have lowered the temperature on Canada’s previously red-hot housing market,” she said, adding markets to the west should outperform those in central and eastern Canada.