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Plex Prices Temporarily Influenced by Recent Tightening of Mortgage Insurance Rules

Plex Prices Temporarily Influenced by Recent Tightening of 
Mortgage Insurance Rules

As  our  measure,  we  did  not  use  the  rate  of  price  increases;  rather,  we  used  the percentage  of  sales  transactions  that  were  concluded  at  a  price  that  was  above  the asking  price.  This  normally  occurs  when  many  buyers  are  competing  for  the  same property, resulting in multiple offers.

In recent years, even though it was a strong seller’s market in most areas of the province, the percentage of transactions concluded at a price above the asking price remained  low.  Chart  1  shows  the  evolution  of  this  percentage  across  the  province since January 2005. It represented between only 2 and 3 per cent of transactions, with the exception of two periods1: 1) in the three months preceding April 2010, when the second tightening of mortgage insurance rules were implemented; and 2) in the three months preceding March 2011, when the third tightening of mortgage insurance rules were implemented. These periods are identified by the shaded areas on the chart.  
Using  hypothesis  tests2,  we  examined  whether  the  impact  of  the  tightenings  on  the percentage of sales concluded at a price above the asking price was significant from a statistical  point  of  view.  In  other  words,  can  the  announcement  of  a  change  in mortgage insurance rules mostly explain the peaks seen on the chart?

Tightenings Temporarily Exerted Upward Pressure on Prices 
Our  first  result  indicated  that  the  announcement  of  the  April  2010  and  March  2011 tightenings had a significant impact, upward, on the percentage of sales concluded at a price above the asking price.
During these two  periods,  some  buyers advanced their  purchase  and,  as a  result,  the demand  for  properties  became  temporarily  much  higher  than  the  supply,  creating  an inevitable upward pressure on prices. In addition, it is important to understand that the implementation of the new rules had a significant impact on some buyers’ purchasing power. Before the implementation of the new rules, buyers were able to finance a larger amount  of  money,  as  shown  in  the  example  described  in  the  box.  In  this  example,  a buyer who chose a five-year variable rate mortgage was able to borrow a maximum of $327,500,  but  could  only  borrow  a  maximum  of  $213,500  after  the  implementation  of the new rules. In a context of multiple offers, some buyers logically preferred to increase the  amount  of  their  offer  a  little  in  order  to  present  their  mortgage  lender  with  an accepted promise to purchase before the implementation of the new rules, and thus be able to borrow a higher amount. 

The Tightening of April 2010 Had a Greater Impact
Our second result indicated that, as we can see in chart 1, the tightening of April 2010 had a greater impact than that of March 2011. Thus, the announcement of the lowering of the maximum amortization period from 35 to 30 years had a lesser impact than the changes announced  in  February  2010,  which  introduced  the  requirement  of  having  to  meet  the credit  standards  for  a  five-year  fixed-rate  mortgage.  But  the  tightening  of  2010  included another  change  in  the  rules  that  directly  affected  residential  properties  with  one  to  four dwellings, meaning primarily plexes.   

Results Mainly Affected Plexes
At  the  same  time,  our  results  show  that  it  was  mainly  plexes  (two  to  five  dwellings)  that posted an increase in the percentage of sales transactions concluded at a price above the asking  price  (see  chart  2). Three factors  can  explain  this  situation:  first,  plexes  were  the property category that already had the tightest market conditions, meaning that the supply was already much lower than the demand. Second, plex prices are generally higher than the other property categories, which implies that the amounts borrowed are higher and this makes their purchase (and their price) more sensitive to financing conditions. Finally, with regard specifically to the tightening of April 2010, the rule under which the minimum down payment  increased  from  5  per  cent  to  20  per  cent  for  buildings  in  which  none  of  the dwellings are occupied by the owner4 is likely to incite another category of buyers to take action  quickly.  The  jump  in  the  percentage  of  plex  sales  concluded at  a  price  above the asking  price  in  the  period  preceding  the  implementation  of  this  measure  was  probably fuelled by a number of buyers who were seeking a small revenue property for investment purposes and who chose to make their purchase just before the minimum down payment was increased. 

Phenomenon  was  Noticeable  in  the  Areas  of  Montréal,  Québec  City  and Gatineau
Geographically,  we  tested  each  of  the  metropolitan  areas  to  determine  whether  the tightenings  had  an  impact  on  the  percentage  of  sales  concluded  at  a  price  above  the asking  price.  We  noticed  that  the  impact  was  significant  in  the  Metropolitan  Areas  of Montréal, Québec City and Gatineau, and this applies to the tightening of April 2010 and that  of  March  2011.  Conversely,  the  impact  was  not  significant  in  the   Saguenay, Sherbrooke and Trois-Rivières Metropolitan Areas. 
Because it is mainly plexes that are subject to multiple offers, it is not surprising that the markets in Montréal, Québec City and Gatineau were the most affected. In each of these areas, we noticed that the central neighbourhoods were the most affected.

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Québec Landlords Association (1)

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