Tighter mortgage rules: How far is too far?

Has Canada's Finance Minister Jim Flaherty unnecessarily put the economy in peril by clamping down too hard on mortgage rules? A national mortgage industry group thinks so.

It's a bold call to make. But it may be too early to dissect the impact and that's why all eyes will be on home sales and jobs data.

In a report released this week, the Canadian Association of Accredited Mortgage Professionals argues the latest changes to mortgage insurance rules put in place this summer "are unnecessarily jeopardizing the health of Canada's housing markets and the broader economy." The report was written by the group's chief economist, Will Dunning, whose views the report states are his own and are "strongly felt."

"The housing resale numbers behave like a canary in the mine for us," says Dunning in a release. "Since the government tightened mortgage accessibility for the fourth time this past July we've seen a drop in resale activity that I think foreshadows an overall decline in the housing market."

The rule changes make it tougher to get a mortgage. They were largely aimed at helping to curb the rise in the debt-to-income ratio for households -- at a record 163 per cent in the second quarter -- fueled in part by a frothy real estate market. All this amid a tepid global recovery.

Something needed to be done given the economic hodgepodge. Tightening of the mortgage rules, so far, appears to have been a justifiable way to calm things down.

But Dunning argues the changes may be too powerful. Since the new rules took effect in July, Canadian housing resale activity has shrunk roughly 8 per cent compared to a year before, he says in the report, which also provides analysis on first time homebuyers shut out of the market because of the changes.

He fears further slowing of housing activity due to the policy changes risks tipping the housing markets into unbalanced conditions, in which prices start to fall. Once that happens the outcome is anyone's guess, but the worst-case scenario is a downward spiral that "wreaks substantial economic damage."

The logic here is that house prices are intertwined with the job market, which affects housing demand and so on. Employment is a key driver in demand because it gives people the confidence and ability to make choices such as renting or buying a home.

All valid points to raise. That's why all eyes will be on data in the coming months.

Any numbers that hint of a broader housing slowdown will be key, as well as related house price data, says David Tulk, chief Canada macro strategist at TD Securities. Another clue is housing-related consumer spending. Home renovations and other house choices are a good indication of a consumers' confidence in house values.

"As long as interest rates remain low and as long as employment remains reasonably well supported, activity adjusts. Everyone just realizes it's just the new rules of the game," says Tulk.

"You may have denied that marginal buyer access to the market, but for everybody else there's enough of them out there that sales activity starts to increase."