05/22/2012 02:18 EDT | Updated 07/22/2012 05:12 EDT

Tighter mortgage rules not enough in hottest real estate markets, OECD says

OTTAWA - Moves by the federal government to tighten mortgage lending rules aren't doing enough to cool the housing market in the hottest regions in the country, the Organization for Economic Co-operation and Development said Tuesday.

OECD senior economist Peter Jarrett said while some areas will benefit from the changes, red-hot markets like Toronto are unaffected by the more restrictive rules.

"The risks are that people put too many eggs in one basket," Jarrett said in warning that low rates entice homebuyers to borrow more than they can sustain at higher rates.

The posted rate for a variable rate mortgage at Canada's big banks stands at prime plus 0.2 percentage points, or roughly 3.2 per cent.

"If rates go up something like we are suggesting then mortgage rates will be in more like the five per cent range," Jarrett said.

The OECD has suggested the Bank of Canada begin the raise interest rates this fall with a target of 2.25 per cent by the end of next year, up from one per cent where it has stood since September 2010.

"We feel that at least in the hottest real estate markets, particularly Toronto, that that would be a good signal that people should think twice about continuing to leverage up in order to buy more house than maybe they really need," Jarrett said.

The Paris-based international development body recommended last year that the Bank of Canada look to start raising interest rates, but was ignored as the European sovereign debt crisis rocked the global economy and prompted the central bank to remain on hold.

Jarrett said as long as the European sovereign debt crisis doesn't explode again this summer, higher rates will be justified.

Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have both warned Canadians repeatedly that higher interest rates are coming as rates have lingered near historic lows for years.

The central banker has said that record high household debt is the number one domestic risk to the economy.

For his part, Flaherty has tightened mortgage lending rules three times in recent years including reducing the maximum amortization period and hiking the minimum down payment.

Canada Mortgage and Housing Corp. and the Office of the Superintendent of Financial Institutions have also tweaked the system and may be preparing to do more.