The federal department of Finance announced a trio of changes to the rules for government-insured mortgages last month. The changes are intended to prevent the building of a bubble in the Canadian housing market and to help curtail the growing consumer debt burden.

There is no consensus among economists that either situation is currently in the danger zone, but there are warning signs.

Late last year, the Bank of Can-ada observed that the household debt/income ratio has been rising steadily. The BofC warned that this trend suggests that heavily indebted households are increasingly vulnerable to negative economic shocks, such as rising interest rates and renewed global economic weakness that could undermine the employment picture and income levels.

Moreover, the BofC warned that these events could lead to rising loan defaults, spurring tighter credit conditions, which could weaken both the economy and the financial services sector.

Fears of a Canadian housing price bubble have been around for several months now, too. The latest data from the Canadian Real Estate Association show that on a national basis, average home prices rose by almost 20% year-over-year in January, as was the case for the past few months.

The rule changes for government-insured mortgages are intended to address both the prospect of an emerging housing bubble and the increased vulnerability of households to higher interest rates on their debts.

Specifically, the rules, which are slated to take effect on April 19, will require that all borrowers meet the standards for a five-year, fixed-rate mortgage, even if they take on a mortgage with a lower interest rate and a shorter term.

This tougher threshold may mean that some of your clients will no longer qualify for mortgages, and those that do qualify should be in a better position to afford their mortgages, even as interest rates rise.

Finance Canada is also cutting the maximum amount Canadians can withdraw in refinancing their mortgages to 90% of the value of their homes, down from 95%. That move will reduce the ability of households to use their homes to fund consumption.

Finally, people who are buying investment properties will be required to make a minimum down payment of 20% to get mortgage insurance, up from the current minimum of 5%. This measure is clearly intended to limit speculative activity in the housing market, which can fuel unsustainable price growth.

When announcing the changes, federal Finance Minister Jim Flaherty said: “There’s no clear evidence of a housing bubble … [but] a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing.”

In this case, according to Fla-herty, the government is trying to “help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it.”

For the most part, analysts approve of the rule changes, even though most insist that the Canadian housing market has not entered bubble territory. A report from Bank of Montreal’s capital markets division states that its analysts don’t believe there is yet a bubble in the Canadian housing market, but it concedes “the risk of one forming increases the longer the housing market stays as hot as it is.”

Indeed, the latest data on Canada’s housing market point to some pretty frothy conditions. In January, existing home sales were up by 58% from their levels a year ago, and prices were up by almost 20%, year-over-year, for the fourth month in a row.

However, analysts point out that annual sales and price data present a distorted upside because market activity was subdued at the same time last year, when the economy was still in the grip of a recession. Moreover, some see signs that the heat in the real estate market is already subsiding.

A report by Toronto-Dominion Bank’s economics department notes that while housing demand remains strong, the supply has increased faster than expected, and there are signs of a gradual cooling in the market: “On a seasonally adjusted basis, the sales/new listings ratio has decreased from 0.68 to 0.61 over the past three months. As a result, month-over-month price growth has also eased.”

While this easing in prices has yet to show up in year-over-year statistics, the TD report says, it should become apparent in the next couple of months.

@page_break@Additionally, some analysts note that the current homebuying trends are also being stoked by temporary factors, such as the prospect of higher tax costs in Ontario and British Columbia once the harmonized sales tax takes effect on July 1. Prospective homebuyers hoping to avoid this extra hit may be buying sooner than they would otherwise, which would fuel sales now, but also portend organically slower demand in the second half.

Similarly, some analysts suggest that the changes to the mortgage rules might also boost buying in the short term, as some consumers rush to beat the new rules taking effect in April.

Ultimately, the TD report concludes, the rule changes are a good idea: “In our opinion, the announced changes are prudent. They will not dramatically impact housing; but they will help to cool the market, temper speculation and reduce the risk to personal finances from the inevitable future rise in interest rates.”

In conjunction with the expected cooling of housing markets, the TD report adds, the rule changes reduce the threat of a housing-price bubble emerging during the year. And, the report notes, more intrusive measures — such as boosting the minimum down payment for owner-occupied homes or reducing maximum amortization periods — aren’t justified at this point but could still be an option if the housing market defies expectations of a cooling trend in the months ahead.

Although preventing a housing bubble is a worthy goal in its own right, the new mortgage rules may also play the more important role of helping to limit the amount of debt that households are taking on. That should make life a little easier for the BofC as it grapples with the tricky decision of when to start raising interest rates.

As long as interest rates stay at their current, rock-bottom levels in order to ensure that an economic recovery is truly entrenched (and the BofC has committed to keeping them there until at least the second half of this year), households are naturally encouraged to keep loading on debt. The fear is that they will have a hard time keeping up payments on all the debt they have accumulated in an ultra-low-rate environment once rates begin to rise to more normal levels.

Says another recent TD report: “Given the current level of debt, a return to a neutral monetary policy stance will lift debt service costs to 9.3% of income by 2013 — a 20-year high, and up from its current level of 6%. This will have significant implications for the economic outlook. While we have seen an impressive rebound in consumer spending during the first two quarters of the recovery, large debt levels could become an impediment to consumer spending once interest rates start to rise, as households will have to devote a greater share of their incomes to servicing their debt.”

Indeed, the prospect of widespread household deleveraging is something that is hanging over several of the world’s major developed economies.

A recent report from San Fran-cisco-based McKinsey Global Institute singles out the Canadian household sector as a candidate for deleveraging in the years to come, along with overstretched consumers in the U.S., Britain and elsewhere.

McKinsey research has found that a typical deleveraging period after a financial crisis is six to seven years. The report forecasts the current period of adjustment will likely be slower and take longer than in the past, thereby “creating severe economic headwinds.”

Deleveraging is a threat to growth at the best of times, but in the modern, highly synchronized and integrated global economy, the situation becomes that much tougher — especially if several major countries are going through a deleveraging period at the same time, so there are fewer fast-growing economies to pick up the slack in demand.

Moreover, this latest episode of deleveraging will be occurring at a time when these countries are also home to aging populations, which serve as both an inherent headwind to economic growth and a serious challenge to government finances, thereby limiting their ability to help support growth.

In Canada, one factor that may be insulating households from the need to deleverage for now is the hot housing market. A report from National Bank Financial Ltd. indicates that Canadian households are in relatively good shape, at least compared with their U.S. counterparts. The report allows that the debt/net worth ratio of Canadian households is already at its highest level on record — 24.7% — but this is still much better than the situation in the U.S., where the ratio is also at a much higher, record level of 36.1%.

In both countries, this ratio has risen recently due to a decline in net worth, the NBF report says. But the reason Canadian households are in better shape, it explains, is that domestic wealth has been hurt only by falling financial assets, whereas the U.S. consumer saw the bottom fall out of both financial assets and real estate values.

“What made the big difference in the U.S.,” the NBF report says, “is that the decline in real estate asset values had nearly as much of an impact on household net worth as did the stock debacle.”

In other words, Canadian household debt levels don’t appear nearly as onerous as they do in the U.S. because our domestic housing price increases have, so far, proven sustainable. Debts built up alongside an increase in net worth that later proves illusory can leave household balance sheets in much worse shape.

Which is one more reason to prevent the housing market from becoming a bubble.

“Many borrowers, lenders, builders and others affected by activity in real estate markets may not like changes to the regulatory environment,” the TD report on the housing market says. “However, it must be stressed that boom/bust cycles in real estate are not desirable for anyone. The optimal outcome is moderate sales growth, accompanied by sustainable price increases, which keep affordability accessible to potential buyers, and within a market that provides the right incentives for debt management.”

According to the TD report, the changes to mortgage rules “seem consistent with these objectives.”

Also, in the meantime, Finance Canada’s move to cool the housing market and curtail debt accumulation eases some of the pressure on the BofC to raise interest rates in response to fears that the rock-bottom rates may foment a real estate bubble.

A report from Deutsche Bank Securities Inc. of says the new rules will reinforce the BofC’s current policy stance for a couple of reasons: the BofC doesn’t believe the Canadian market is as overinflated as the U.S. market was, and so there’s less likely to be a crash in real estate values; and the central bank remains worried that the relative strength of the Canadian dollar and weak U.S. demand will continue to drag on Canada’s economic growth.

“Our take on this,” the DBS report says, “is that, until the [BofC] sees significant upward pressure on prices, it is unlikely to adopt a more restrictive policy stance.” IE