TD Bank says tighter mortgage rules should do the job of cooling Canada's hot housing market in the short term, but higher interest rates will be needed to return the market to saner levels.
The bank's chief economist Craig Alexander estimates the new rules, which went into effect July 9, will shave five percentage points off sales activity and cut prices by three per cent on average during the second half of this year and early 2013.
In the next three years, he expects the combination of the tighter rules and anticipated modest increases in interest rates will result in a 10 per cent price correction on homes.
While it is early, there are already tentative signs that the new rules have tempered sales, if not prices, especially in the country's hottest markets - Toronto and Vancouver.
The Toronto Real Estate Board reported Thursday that sales of existing homes in the greater municipal area fell 12.5 per cent from last year, although the average price of $479,095 was 6.5 per cent higher.
Meanwhile, the Vancouver board said sales dropped 30.7 per cent in August, while the average price was only 0.5 per cent lower at $609,500.
In July, Finance Minister Jim Flaherty reduced the amortization rate on new insured mort-gages to 25 years from 30, bringing the maximum period for paying off a home back to the historic level. It was the fourth time Flaherty had tightened mortgage rules in as many years, incrementally dropping to amortization period from the high-water mark of 40 years.
Alexander says the latest moves, which hike mortgage costs by $140 a month on the average home, may be even more effective than the previous efforts in slowing the market.