The Globe's Real Estate Beat offers news and analysis on the Canadian housing market from real estate reporter Tara Perkins. Read more on The Globe's housing page and follow Tara on Twitter @TaraPerkins.
Canadian housing economist Will Dunning says that actions the federal government took to cool the housing market back in 2012 could make any price declines in Toronto's condo market worse in the years to come.
"If and when there is a correction in the condo market, the severity will have been aggravated by the actions of the federal government, which elected to depress demand at a time when demand was already beginning to weaken organically and a wave of supply has been developing," Mr. Dunning writes in a new research note.
Former Finance Minister Jim Flaherty tightened the country's mortgage insurance rules four times in the years after the financial crisis, as he sought to stem the rise of consumer debt levels and home prices. Mortgage insurance is mandatory in Canada when a federally-regulated bank sells a mortgage to someone with a down-payment of less than 20 per cent. The changes included cutting the maximum amortization of an insured mortgage to 25 years from 30.
Many economists have said that Mr. Flaherty's moves were wise, and that the housing market would have become more inflated and prices more overvalued without them.
But Mr. Dunning, who does his own research on Canada's housing market and also does work for the association that represents mortgage brokers, suggests that the success of the mortgage insurance rule changes is yet to be determined.
He sketched out a scenario in which Toronto's condo prices would fall by about 10 per cent, as a result of rising supply and falling demand.
"I believe that the federal mortgage insurance policy changes of the past few years will continue to weigh on demand, for both owner-occupants and investors," Mr. Dunning writes.
His 10-per-cent-price-correction scenario also assumes that job creation does not bounce back to a healthier rate in Canada's most populous city, and that interest rates remain constant.
"The timing of this process is highly uncertain – it probably won't start for at least a half-year, and if there are further delays in (condo construction) completions, it could be a long way off," he writes.