Yesterday the Finance Minister laid forth three measures to "strengthen housing financing". The government can't bring themselves to say the word "bubble", because then it becomes a self-fulfilling prophecy and if there is a bubble, the federal government are the ones to blame for it. But that's what this is: an attempt to avert a housing bubble.

The measures, as quoted from the Government of Canada website (http://www.fin.gc.ca/n10/10-011-eng.asp), are as follows:

• Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
   
• Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
   
• Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
   

But is Canada prone to a housing bubble? Last year, as the American market fell to pieces, I read a tonne of articles all claiming that the brilliance of the Canadian banking system would never allow us to fall victim to what had happened in the States. Much of it was completely true. So what's happened to turn the articles to talk of Canadian housing bubbles and government regulations designed to avert said bubbles?

Simply put, housing prices went up much higher and much faster than any of the financial pundits and policymakers predicted. To say the result is noticeable would be an understatement. It is to the point that, in Ottawa, homebuyers count themselves lucky if they don't have to enter a bidding war to buy the house that they want. The reason? Interest rates sitting at historically low rates for an extended period of time with a date announced for when the rates would go up. Not surprisingly, that pushed a lot of buyers into the market and has pushed more and more in as the date for the interest rate increase looms closer and closer.

Bubble believers point to the fact that the average Canadian house price is approximately five times average net income compared to a historical average of 3.7%, but these ratios fall very much in line and are often lower than many other western countries. The fact is that the vast majority of buyers buy based on what they can afford. That's why I think the first measure introduced is an excellent one and one that we need regardless of the strength of the housing market.

A bursting housing bubble, as we have seen in the States, is typified by a drastic increase in the number of mortgage delinquencies, pushing a huge number of homes into a market competing for a decreasing number of buyers, dramatically pushing prices down. The number of delinquent Canadian mortgages is below 0.5%. In August 2009, the U.S. delinquency rate was 7.58%. That's fifteen times what we currently face, so it's highly unlikely that this is a problem that we are going to see become a major driver of a bursting Canadian real estate bubble. Back to the brilliance of the Canadian banking system: the overwhelming majority of Canadian mortgages are conventional and conservative. Without getting into the complexities of what subprime mortgages are (let's just all agree that they are evil, economy destroying monsters), the Canadian subprime mortgage market is about 5%, whereas when the American housing market crashed, their subrime mortgage market represented 22% of their entire mortgage market. Simply put, there aren't a huge number of Canadian mortgagors who are underqualified or who won't be able to afford their mortgage when they become due.

So if Canadians don't generally borrow more than they can afford and if the rules and policies of our lenders are such that borrowers seldom put themselves in a position that they won't be able to safely navigate through, then why are so many people convinced that we are in a housing bubble? It's because interest rates have been so low for such an extended period that when they do rise, it will have a negative affect on an average buyer's affordability. The interest rates are currently artificially low, placed there to "stimulate" our economy as our neighbours to the south struggled. Rather than limiting the ability of Canadians to buy rental properties as measures two and three do, the government should be concentrating on bringing interest rates back in line with where they should be; carefully. If interest rates are brought in line carefully, then affordability will decrease, but not so much that current homeowners will, in mass numbers, be unable to afford to stay in their homes. Buyer demand will slow and price increases may slow down considerably, but when compared to a marketplace that currently features bidding wars around every corner, that's not such a bad thing.

The government's fears of a housing bubble arise directly from the government's intervention in the housing market by artificially lowering interest rates. They propose to solve the issue created by their intervention by intervening further. It is my belief that these intervening measures will only require their own intervention in a couple of years as the inability of smaller investors to invest in rental properties will drive up the demand, and therefore the price, of rental units for renters, creating a crisis of unaffordable rental housing in the years to come. Real estate markets ebb and flow. This is a fact of any financial market. There are not any indicators that Canada's housing economy will falter in a major way, intervention or not, so is the potential damage to the rental marketplace for renters or the limitations put on Canadians looking for a safe place to invest and grow wealth necessary?

Count me as not thinking so.