To prevent a housing market bubble from forming while interest rates have stayed low, the Harper Government tightened mortgage regulations four times in each of the past four years (Table 1). This invites the question: what effect have they had?
The short answer is: it depends. For one, it depends on the year in which the changes were announced. Tighter mortgage regulations announced in 2009 coincided with the recession, so it’s impossible to know how they affected the housing market.
It also depends on how much time there was between when changes were announced and when they were implemented, and the extent to which the upcoming changes were in the news. Changes to mortgage regulations didn’t get as much press in smaller and more affordable local housing markets, so buyers there were less influenced compared to those in larger and more expensive housing markets.
Across those larger markets, however, tightened mortgage regulations did affect sales activity. Their impact serves as a textbook example of what economists refer to as “the announcement effect,” which speaks to how people react to news.
If you were actively looking to buy something on credit and learned that changes to credit regulations in the near future might mean you no longer qualify for financing, would you hurry up your purchase? Yes. When home buyers learned that tighter mortgage regulations would come into effect two-and-a-half months later, that’s exactly what many did.
Changes to mortgage regulations made between 2010 and 2012, all took effect two-and-a-half months after they were announced. That gave home buyers plenty of time to get into the market before the changes potentially affected their qualification or options for mortgage financing, but those hastened purchases came at the expense of activity in the months immediately after regulations were tightened.
However, when mortgage regulations were tightened further in 2012, there were only two-and-a-half weeks between the time they were announced and implemented. That gave home buyers little time to react, so the extent to which the impending changes caused buyers to hurry their purchase was limited.
What the 2012 changes did do was cause a number of home buyers to re-evaluate how much home they could afford while still qualifying for mortgage financing.
The compound effect of successive tightening of mortgage regulation has been to sideline a number of home buyers who may have previously qualified for mortgage financing. While sidelined, they’ll be further saving for a down payment and repaying non-mortgage debt – and that’s as the Finance Minister intended.