Toronto's new mortgage rules


It 's not much use saying that something should have been done sooner. To some extent, you have to give the new federal government credit for making an attempt to put a lid on what so many experts fear is a Canadian property bubble.

The debate now is what impact the move to increase down payments on houses worth more than $500,000 will have.

Is it too much? Enough to pop the bubble that so many people have identified? Or, at the other end of the spectrum, will it be too little to have any serious impact on a mortgage market that is constantly finding fresh ways to entice new buyers?

As always when trying to solve real-world problems, the government is making policy in uncharted waters. Unfortunately, the only way to be sure of the effect is to wait a few months and see what happens.

Unlike other parts of the country, in the two most overpriced Canadian real estate cities, Toronto and Vancouver, homes priced over half a million aren't just for the very rich.

Even for houses listed for more than $1 million, sellers offer deals that seem to be aimed at first-time buyers.

Just days ago the C.D. Howe Institute, a Canadian economic think-tank, warned that many first-time buyers are so overextended that they are teetering on the edge of ruin.

"The share of households that have no financial buffer has been going up. There's more financial vulnerability now than there was before," said C.D. Howe economist Craig Alexander.

Many studies have reported that young people are already getting large chunks of their down payments from the Bank of Mom and Dad. That means even the down payment can be an invisible loan that will need to be repaid, especially if it comes from a nest egg the parents will need for their extended retirement.

The question that really cannot be answered yet is whether the new rules will have the desired effect. Clearly the government wants to cool the market without crashing it, aiming for the storied soft landing.

According to efficient-markets theory, any price rise will have a slowing effect. But having just read Richard Thaler's new book on behavioural economics, Misbehaving, I fear the power of psychology will have much more effect on how buyers respond.

By CBC News

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Mark Barkhordari

Mark Barkhordari

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CENTURY 21 Leading Edge Realty Inc., Brokerage*
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