That's the whole point!

In its monthly press release on housing market activity, the Canadian Real Estate Association (CREA) reported a small increase in activity across the country.  However, it warned that the recent measures announced by the Federal government to tighten mortgage eligibility rules might put a crimp on things: "For first time buyers, the stress test for those who need mortgage default insurance will cause them to rethink how much home they can afford to buy", says CREA President Cliff Iverson.

Yeah, well, Mr Iverson, that's not an unexpected and unwelcome side-effect of the Federal measures. It's the whole point of the exercise. With the household debt/income ratio rising ever higher -- at over 167%, it's higher than the comparable US ratio was just before the financial crisis -- and with the Bank of Canada unable to act because of the fragility of the entire economy, Finance Minister Bill Morneau saw little choice but to act.

Iverson goes on to say, "The federal government will no doubt want to monitor the effect of new regulations on the many varied housing markets across Canada and on the economy,  particularly given the uncertain outlook for other private sector engines of economic growth."  Good that he sees the big picture, but when he portrays housing as an engine of economic growth, what exactly is he looking at?

Investment in new housing construction, by type of dwelling

This graph, taken from Statistics Canada, certainly does not suggest there is much of a secular upward trend in investment in residential construction.  Like the rest of the private sector, and not only in Canada, the household construction industry has been bafflingly reluctant to take advantage of rock-bottom financing costs.

As a realtor, Iverson may be thinking something else: that the secondary buying and selling activity in homes is itself a producer of growth. Considering that the market is being driven entirely by a borrowing binge that is seriously crimping the disposable incomes of many Canadians, this seems a dubious proposition at best.  Iverson is undoubtedly right when he says that the government will "want to monitor" the impact of the measures (which take effect this coming Monday, October 17), but if he thinks that Minister Morneau will backtrack at the first sign of a correction, he's destined to be disappointed.