If you haven't heard about the new mortgage qualification rules by now, then take a moment and read up the ways in which the new mortgage rules will impact first-time home buyers.

Experts and laypeople alike are starting to come to terms with the new mortgage regulations, what it means for the current housing market and what it means for anyone planning to buy a home in the near future. But in a report released this week, economist Will Dunning, chief economist for Mortgage Professionals Canada, laid out what he thinks to be the longer-term impacts of the changes in a report titled “Slamming on the Brakes: Assessing the Impacts of Changed Criteria for Mortgage Qualification.”

Since this is only the first week of the new mortgage regulations, and aspects of it won't be rolled out for another month at lease, there isn't enough data to tell the true fallout. Experts, however, say that housing market activity nationwide may be reduced by anywhere from six to 10 per cent. “This would be the initial, direct impact,” Dunning wrote. “Second round effects (reduction in move-up and move-down buying activity) have the potential to double the impact,” which he concludes would fall somewhere between 12 and 20 per cent.

And, he mentions, these effects will occur in all parts of the country, not just in Toronto and Vancouver, the two markets that have been raising the average home price for Canada and that have been being watched very closely -- and reported on widely for months on end. Apart from those markets, housing affordablity nationwide has been fairly balanced, apart from slight dips and slow rises here and there. To think that the rest of Canada will remain untouched is unrealistic; Dunning expects that these areas “will move from balance to weakness; the really hot markets (now Toronto and environs, but formerly also Vancouver) will move from ‘extremely hot’ to ‘hot’.”

Dunning also expects there to be wider economic impacts of the mortgage rules in the way of job growth and creation, something which home builders and developers have been saying for quite some time. “A third effect from this policy change is that job losses that occur as a result of a weakened housing market would further reduce housing market activity (in turn, further aggravating the economic effects).” Slower housing market activity means fewer housing starts, fewer housing-related jobs, and if people don't have jobs, they, in turn certainly won't be buying any houses. According to Dunning, a “15% reduction in housing starts would cost about 50,000 jobs in construction and other industries that contribute to the construction process.” And this doesn't just affect home buyers. Fewer home buyers means more renters, and a tighter rental market is equal to a lower vacancy rate and higher rents. The Bank of Canada predicts that economic growth won't pick up until 2018 based on current information, and dampening a housing market on top of a sluggish national economy could have effects that the government, while they may have considered, would certainly want to avoid.

As to what Dunning thinks about the stress tests, he says posted mortgage rates have an “artificial existence” in the first place because they aren't determined by market forces and they “provide no guidance” as to what interest rates will be in the future. Using this standard to determine whether or not home buyers will be able to afford their mortgage is “unnecessarily cautious” and the next steps of the policy should go so far as to “establish an alternative benchmark interest rate through an explicit assessment of risks for interest rates. This requires urgent attention.”
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This is a lot of doom and gloom and ‘ifs’ to absorb. This, however, is exactly where individuals can have a big impact in how the housing market changes in the months and years to come. We as individuals have no say in changes in mortgage guidelines. We do, however, have a say in what we do with that information. Whether that means not selling our home because we don’t think we’ll be able to find another one or changing our retirement plans to downsize much earlier because we’re expecting home prices to fall before we’re really ready to sell, every choice that we make regarding housing is determined by how much we buy into forecasts, expert opinions, and predictions. All of this talk about housing bubbles that we’ve heard on newspapers, television, and yes, on the internet, have spurned many of us to buy homes before we were really ready, in order to ensure that we could buy a home at all. But, Dunning says, there’s another side to that.

“Much less talked about is that there is an opposite to a bubble: if potential home buyers expect that house prices will fall, and decide not to buy as a result, then this can become a “self-reinforcing expectation”, which is also dangerous for the market and the broader economy,” he writes. “If the weakened housing market causes consumers to expect (or fear) that house prices could fall, this would reduce housing demand, further impairing the economy.”

It will be months before we see true impacts of these changes play out. Home sales data released in early 2017 will affect home prices, which will determine which way that we – home buyers and home sellers – react and make pricing decisions. Dunning also says that the impacts on mortgage lending will also take time to appear, because the mortgage funds are advanced when the sale is completed not when the sale is agreed, and because there are reporting and publication lags for the data.

Everyone seems to be on the same page that these new measures will slow housing activity and, in turn, housing prices. How much remains to be seen. But Dunning thinks that there may also be some unintended consequences, such as removing the incentive for borrowers to choose a longer-term, fixed-rate mortgages and borrowers going for the shorter-term mortgages with the lower interest rates. And changing mortgage competition among lenders could result in higher interest rates, both for new home buyers and homeowners renewing their mortgages.

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