Wed Post #1: What will the government do with a stubborn real estate market? Hit it again, of course.

“That deafening silence you hear is the sound of the Canadian housing bears gone quiet. Not only has the resale market absorbed last year’s round of mortgage rule tightening, but the supposedly at-risk banks have just recorded a unanimously better-than-expected earnings season, with a handful of dividend increases to boot.”

Those are the goading comments of Bank of Montreal economist Robert Kavcic, comments contained  in a research note he sent out on Friday.

And while this housing bear blog may have taken a summer break, we are far from quiet.

We are reminded of our January 13, 2013 post in which we talked about a Bank of Canada study suggesting lower home prices were a national priority.

A substantial downturn in prices – say, 10 to 20 per cent – would, in theory, not only reduce mortgage debts for new home buyers, but, significantly, push down non-mortgage debt to the tune of 4 to 8 per cent. That would get Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney a lot closer to solving the country’s household debt problem, reducing what is considered a serious risk to the stability of the Canadian economy.

And if lower home prices are a 'national priority', you can be sure the Bank of Canada and the OFSI are far from finished in the efforts to achieve that goal.

Which is why it is not surprising that Canada's banking 'regulator eyes tighter mortgage rules.'

Canada’s banking regulator has been gathering detailed mortgage information from financial institutions, in what could be a precursor to changes in the rules for home loans.

The Office of the Superintendent of Financial Institutions (OSFI) has spent months considering a tightening of mortgage rules for lenders, a decision that’s being weighed as the housing market begins to pick up after a year-long slump. That slide began when Finance Minister Jim Flaherty tightened the rules for mortgage insurance in July, 2012.

Policy-makers in Ottawa, including OSFI head Julie Dickson, have been concerned consumers are taking on too much debt and that house prices have risen too much. Toronto-Dominion Bank economists estimate that home prices are 8 per cent above what they’re actually worth, nationally. The average selling price of existing homes in July was 8.4 per cent higher than a year earlier, driven by a resurgence in the pricier markets of Vancouver and Toronto.

Years of ultra-low interest rates have spurred consumers to take on more mortgage debt than they might have otherwise. To rein the market in, Ottawa has tightened the rules around mortgage insurance four times since 2008 – Mr. Flaherty’s latest move cut the maximum amortization period for an insured home loan to 25 years from 30. Insurance is mandatory for home buyers who have less than 20 per cent of the purchase price of a house as a down payment.

The government and the Bank of Canada have made it clear what they want to occur in the real estate sector.

The next moves should not really come as a great surprise.

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