In this document, we examine the effects of the latest tightening of mortgage insurance rules on the performance of Québec’s real estate market. Since July 2012, these rules limit the maximum amortization period for new insured mortgages to 25 years, down from 30 years.
In July 2012, Canada’s Finance Minister Jim Flaherty tightened mortgage rules for the fourth time since 2008 (consult the annex for the chronology) in order to slow the Canadian housing market1 and household debt. At the time, the impact on mortgage payments by reducing the maximum amortization period from 30 to 25 years was equivalent to increasing the interest rate by 0.9 percentage points for the borrower2. These new measures should have logically dampened the real estate market, especially for first-time buyers since they are the ones who primarily make use of mortgage loan insurance3.
To see if the new rules have had a significant impact on the performance of the real estate market, we will use two periods: the 12 month period prior to the tightening of the mortgage rules (August 2011 to July 2012) and the 12 month period following this tightening (August 2012 to July 2013). We will then compare the results of the two periods4. To isolate the effect of the mortgage tightening, all other factors that may have influenced real estate market performance would theoretically have to be eliminated. All factors are evidently not constant in the situation we are discussing, but since there were no major variations to the main determinants of real estate activity5, it is reasonable to say that the tightening of the mortgage rules is the primary factor.
Sharp Drop in Sales
Figure 1 shows the evolution of residential sales across the province before and after the tightening of the mortgage rules. Prior to the tightening, sales showed a clear upward trend, registering eleven monthly increases in twelve months. In total, sales increased by 6 per cent during the period from August 2011 to July 2012.
After the mortgage tightening, provincial sales registered twelve consecutive monthly declines, with an overall decrease of 11 per cent. This is the largest decrease of its kind since the 2008-2009 recession6.
1. Mr. Flaherty was of the opinion that the Canadian real estate market was overheating although his concerns appeared mainly related to the Vancouver and Toronto markets.
2. Based on a negotiated interest rate of 3.5 per cent for a five-year term.
3. Mortgage loan insurance is mandatory for borrowers who do not have the minimum 20 per cent down payment on the purchase price of the property.
4. The short time between the announcement of the new rules (June 21, 2012) and their implementation (July 9, 2012) precludes the possibility that a large number of consumers advanced the purchase of a property before the rules came into force.
5. One of these factors is, of course, interest rate levels. However, mortgage rates have remained very stable and at a historic low during the comparative periods. Other factors to consider are consumer confidence, employment and demographics. Still, there was no change in trend or sudden movement of these variables.
6. Sales fell by 7 per cent during the period from August 2008 to July 2009.