Alison Griffiths

Finance Minister Jim Flaherty's crystal ball may not be clearer than anyone else's, but his announcement on Thursday, June 21 about changing mortgage rules (effective July 9) is as close to a prediction of an impending real estate bubble as we're likely to get.

Flaherty has announced a number of new rules: the allowable amortization period has been lowered to 25 years from 30 (it was briefly at 40 before the financial crisis hit.); homeowners will now only be able to borrow 80 per cent of their property's value when refinancing; homes costing more than a million dollars will not be eligible for government-backed mortgages; and the gross debt service ratio will be set at 39 per cent of income and the total debt service ratio at 44 per cent.

Flaherty made these changes to rein in household debt which last month hit yet another new high. But he's also concerned about real estate prices, which just keep going up in most regions of Canada.

His moves are good ones to reduce household debt but the long awaited real estate correction may already be in the making. A year ago, the international consulting firm Capital Economics predicted a 25 per cent drop in Canadian housing prices over the next three years. "Housing valuations have lost all touch with fundamentals and household debt is at a record high," it concluded.

On Monday, June 11, two TD economists predicted a decline of 10 to 15 per cent over the next two to three years. They cited an oversupply of existing and under-construction condo units as well as the substantial gains enjoyed by single-family homes since the tech bubble burst which are not likely to happen again.

Many Canadians have elected to invest disposable or borrowed dollars in real estate recently rather than in the very fickle stock market. This has helped push prices higher, but this trend can't continue if Flaherty's changes reduce the availability of money for buyers or interest rates rise.

Real estate investment, of course, takes many forms. Some have been buying for tomorrow, i.e. purchasing a home larger, grander or better located, hoping for future gains. Often such homeowners are highly leveraged and will be the first to feel the pain from interest rate increases or when they have to remortgage under the new rules.

Borrowing to renovate your nest is a similar form of real estate investment. Remortgaging or taking out an home equity line of credit and upgrading a kitchen or bathroom may provide a long term benefit by helping your home be the one that goes for a couple of hundred thousand over asking — but that's only if the market keeps rising.