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.
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.