Canada’s financial regulator will release new guidelines for mortgage insurers early next year, including the government’s Canada Mortgage and Housing Corp. – but they won’t drag down the housing market as much as the guidelines for banks have, says the country’s banking watchdog.

The Office of the Superintendent of Financial Institutions will outline what standards it expects the country’s three mortgage insurers to follow when they underwrite a policy on a home. Ottawa has just recently given OSFI the job of overseeing CMHC, a federal Crown corporation that is the largest player in the industry; it was already regulating two private-sector rivals, Genworth MI Canada and Canada Guaranty.

The mortgage guidelines that OSFI released for banks this summer are believed to have played a role in the decline in national home sales for the second half of this year. The new rules pushed lenders to be more cautious in areas such as background and credit checks on borrowers, document verification, and appraisals. The biggest impact is believed to have come from one particular rule that capped the amount that any individual can borrow on a home equity line of credit at 65 per cent of the home’s value.

“I would not expect the same impact” from the rules that OSFI intends to create for mortgage insurers in the new year, Julie Dickson, the regulator’s superintendent, said in an interview.

The final guidelines for banks came out in June. That was shortly before Finance Minister Jim Flaherty tightened up mortgage insurance rules, including cutting the maximum length of insured mortgages to 25 years, in an effort to stem the growth of consumer debt levels and house prices.

While Mr. Flaherty is focused on the risks to the broader economy, Ms. Dickson is responsible for ensuring that the country’s banks, insurers and mortgage insurers remain financially sound. Unlike Mr. Flaherty’s changes, the guidelines that she will release are more likely to focus on the things that mortgage insurers must do behind the scenes to assure that they are not taking on too much risk when they insure homeowners’ mortgages.

“We are in a market where there is a lot of growth in household debt, some froth, and I think whenever you see that you have to act early and try to ensure that people aren’t forgetting sound practices,” Ms. Dickson said.

“Having buttoned-down mortgage underwriting policies does slow things down a bit, so that if mortgages are presented that are outside the policy, [the financial institution] is going to have to take more time to consider it; that does have an impact.”

OSFI is taking action in this area after the Financial Stability Board, an international body made up of regulators and banking experts around the world, suggested that all countries review their rules for banks and mortgage insurers.

The board is chaired by Bank of Canada governor Mark Carney. It suggested, among other things, that mortgage insurers be regulated. Mr. Flaherty moved to put CMHC, which dominates the mortgage insurance business in Canada, under OSFI’s authority earlier this year.

I would emphasize that while a 10% correction sounds scary, in actual fact, this would be a healthy outcome

WHAT THE ECONOMISTS SAID

Twenty forecasters were polled on Canada’s housing market. Here are the results

CANADIAN HOUSE PRICES
A rise of 0.1% in 2012 was the median from 14 forecasts
A rise of 0.1% in 2013 was the median from 12 forecasts

TORONTO HOUSE PRICES
A rise of 0.3% in 2012 was the median from 6 forecasts
A fall of 2.0% in 2013 was the median from 5 forecasts

VANCOUVER HOUSE PRICES
A fall of 3.0% in 2012 was the median from 6 forecasts
A fall of 4.8% in 2013 was the median from 5 forecasts

2a. If you think Canadian house prices will fall, how much (in percentage terms), will they drop from here?

5.0% was the median from 9 forecasts.
Forecasts ranged from 0.0% to 25.0%.

2b. When will they stabilize?

1 said Q1 2012 1 said Q2- Q3 2012
1 said Q4 2013 1 said Q1 2014
1 said Q1 2015 2 said 2015

3. On a scale of 1 to 10, where 1 is extremely undervalued, 5 is fairly valued and 10 is extremely overvalued, what best describes the current average level of Canadian house prices relative to fundamentals?
7 was the median from 14 forecasts
Forecasts ranged from scale of 5 to 8
4. Do you think the Canadian government will tighten mortgage rules within the next 12 months in an attempt to cool the housing market?

10 said yes
4 said no

TORONTO — Canadian housing prices will fall 10% over the next several years and homebuilding will slow sharply in 2013, but the country’s recent property boom is not expected to end in a U.S.-style collapse, according to a Reuters poll.

The survey of 20 forecasters published on Friday showed the majority believe the Canadian government has done enough to rein in runaway prices, preventing the type of crash that has devastated the U.S. market for years.

“This isn’t a sharp correction, this isn’t a U.S.-style correction, it’s just simply an unwinding of the excess valuation that was created by artificially low interest rates for a long period of time,” said Craig Alexander, chief economist at Toronto-Dominion Bank.

“I would emphasize that while a 10% correction sounds scary, in actual fact, this would be a healthy outcome.”

U.S. house prices crashed as a mortgage crisis unraveled in 2008, triggering a financial crisis and leaving a trail of foreclosures, negative equity and financial hardship for millions of people. Housing prices in the U.S. have only begun to rise again this year.

On a national basis, Canadian house prices are expected to drop 10% over the next several years, and housing starts will fall more than 17% to 184,000 units by mid-2013, according to median results of the poll, which was conducted over the last week.

House prices have already begun to cool in some areas but nationally remain 23% higher than their trough in March 2009, according to a Canadian Real Estate Association index.

Respondents in the Reuters poll said house prices will rise 2.0% in 2012 and fall 0.1% in 2013, according to the median of 18 forecasts, putting most of the losses at least two years away.

Median forecasts had Toronto prices rising 5.1% in 2012 and falling 1.3% in 2013. But respondents saw an eventual 5% fall from current levels. Vancouver prices were forecast to fall 2.7% in 2012 and 3.8% in 2013, with an eventual decline of 12.5%.

As sales decline and prices fall, homebuilders will ratchet back on construction starts, the poll showed.

Housing starts, which notched a seasonally-adjusted annual rate of 222,945 units in the third quarter, will decline to 200,500 in the fourth quarter, 186,900 in the first quarter of 2013, and 184,000 in the second quarter of next year.

BITE OUT OF GROWTH

That 17.5% drop in new homebuilding will take a bite out of Canada’s economic growth, fuelled by the housing sector, consumer spending and government stimulus since growth slowed in 2009. But a strengthening global economy should help pick up the slack, Alexander said.

Not everyone is as sanguine. While economists at Canada’s major banks have consistently predicted a softening in prices and a slowing in housing starts, some independent analysts see a very hard landing ahead.

“The housing market is something to be very worried about,” said David Madani, Canada economist at consultancy Capital Economics in Toronto.

Madani, whose forecasts are included in the Reuters poll, has consistently predicted a 25% drop in prices and a plunge in housing starts to just 150,000 next year as builders grapple with too many homes and falling demand.

“The one symptom that housing bubbles always have in common is the over building, and I feel the banks play this down a bit,” said Madani, pointing to recent housing starts well above the 175,000 to 185,000 pace economists say is needed to keep up with population growth.

“We’ve been building above 200,0000 for several years. And we know we’ve been building above demographic requirements because the evidence is in the inventory data – it’s high, it’s not low,” said Madani.

“The excesses are there, it’s plain and clear to see.”

Still, all 15 respondents who answered an additional question said they believe the Canadian government has done enough to slow the housing market and prevent a U.S.-style crash, as Finance Minister Jim Flaherty has argued.

RULE CHANGES HURT

Mindful of the U.S. boom and bust, the federal government tightened mortgage lending rules four times in the last four years to make it harder for home buyers to take on too much debt in their quest for a home.

The rule changes gradually shorted the maximum mortgage length from 40 years to 25 and also put limits on how much homeowners could borrow against their house, among other measures.

While interest rates are not expected to rise until mid-2013, the stiffer lending rules and government warnings about the high debt loads of Canadian households have helped cool the ardor of home buyers, with the hottest markets, including Vancouver and Toronto, already feeling a chill.

Sales of existing homes were down 15.1% in September from a year earlier, and were 6.5% lower in the third quarter from the previous three months, according to data from the Canadian Real Estate Association.

Prices, which lag sales, have started to come down as well. Prices for existing homes dipped 0.4% in September from August, according the Teranet-National Bank Composite House Price Index, but remain 3.6% higher than a year earlier.

Prices of new homes rose 0.2% in the month, the 18th straight monthly gain, and were up 2.4% on the year, according to Statistics Canada.