Ottawa's move to hit borrowers with a dose of cold water will have an impact on house prices from coast to coast by squeezing a number of potential home buyers out of the market.
The questions are how much, and how quickly?
Many experts agree that home prices are currently inflated, particularly in Toronto and Vancouver, and are due for a correction. But there is much disagreement about how much of a prod the market actually needed.
The biggest change for home buyers is that Ottawa will no longer insure mortgages of longer than 25 years, a move that aims to encourage people to pay off their debts faster but will also increase monthly payments. It has the same effect as an increase in interest rates – and, when combined with other changes made by the federal government Thursday, will likely reduce high prices by 5 percentage points from what they otherwise would have been, said Craig Alexander, chief economist at Toronto-Dominion Bank.
But for Finance Minister Jim Flaherty, the gamble is that his measures will lead to a gradual softening on home prices – not a steep drop. And the debate about whether he has gone too far highlights the tightrope that the Harper government is walking as it seeks to stop Canadians from racking up too much debt.
"We believe that these measures are coming too late and that the housing market and household debt are already over-stretched," Charles St-Arnaud, an economist at Nomura Securities International Inc., said in a research note. "Moreover, changes to the amortization period have the risk of providing a very powerful negative dynamic in a housing market that is already showing signs of slowing."
Phil Soper, the CEO of Royal LePage, said that the Conservative government, which had already tightened the rules three times since 2008, should have let the market correct itself at this point.
"I supported the previous moves but I'm disappointed with this particular set of changes," he said. "The market is clearly cooling on a national basis, and I'm concerned that what is essentially a Toronto problem is being attacked with a blunt instrument that's going to hurt the housing market nationwide."
Mr. Soper argued that many experts are too focused on house price growth, while signs of slower sales in the last month suggest that prices will fall on their own.
While the national average home price edged down 0.3 per cent in May from a year earlier, to $375,605, some economists believe the market is overvalued by at least 10 per cent. National averages are being inflated by Toronto. House prices in Toronto rose by 8.5 per cent in April from a year earlier, while they fell 7.5 per cent in Vancouver.
"I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto but not only in Toronto," Mr. Flaherty said Thursday. The government anticipates that less than 5 per cent of new home buyers will be affected by these changes.
Andrew Baulcomb, 27, has been hunting for a two-bedroom bungalow in the $200,000 to $250,000 range with his fiancée in Hamilton. He expects that they might have to wait a year or two longer because of the new rule that cuts the maximum amortization period on insured mortgages.
"Even financially responsible couples may not have a high household income during their mid-twenties, when you're in that age you're often paying back student loans, and in our case we have a wedding coming up," he said. "I think that's a difficult point to deal with."
The moves are likely to have the greatest impact on first-time buyers looking for mid-priced homes. Economists say that Mr. Flaherty is delivering the equivalent of a 1-per-cent increase in interest rates with the cut to amortization.
The Canadian Association of Accredited Mortgage Professionals estimates that 40 per cent of buyers have recently been choosing amortization periods longer than 25 years.
The measures announced by Mr. Flaherty will also have an effect on the higher end of the market, because homes at $1-million or more will no longer be eligible for mortgage insurance, meaning the buyer must have a down-payment of at least 20 per cent.
"I think that the luxury home market will be significantly impacted by it," said Calum Ross, a mortgage planner who works with many buyers in Toronto's high-end market.
He thinks that's a good thing. "It's ridiculous that these people have ever been allowed to get high-ratio mortgage insurance," he said. Last week, he secured a mortgage approval for more than $1.25-million for a couple that he worries can't afford the home, a situation he sees often.
"I told them they were taking on too much risk," he said.