07:29 AM EDT, 09/18/2024 (MT Newswires) -- Canada's recent announcement to increase the limit for mortgage insurance and expand eligibility for longer amortization periods is a "significant" move -- but one that needs to be accompanied by more action on driving the supply of housing, said CIBC.

The bank noted that there are a few lessons to be learned from recent developments in the housing market, the first of which is that markets are capable of responding swiftly to "abnormal" conditions. Higher interest rates of late have brought the mighty housing market to its knees in a relatively short period of time.

Second, housing policy can notably have an impact on the trajectory of the real estate market. CIBC has seen it numerous times in the past two decades in buyers' rapid response to demand-boosting policies such as longer amortization periods and lower down-payment requirements. The swift response of first-time homebuyers in 2007 to the decision to increase amortization periods to 40 years ended up pushing the government to retreat from that idea.

Third, if those policies aren't directed at the core issues facing the market, their impact will be temporary at best. Since 2010, and until recently, most of the changes in mortgage regulations were aimed at tightening market conditions in response to ever-rising home prices. Unfortunately, none of them worked to change the fundamentals of the market in any significant and lasting way.

The latest announcement by the Liberal government increased

the C$1 million price cap for insured mortgages to C$1.5 million,

and expanded eligibility for 30-year mortgage amortizations to

all first-time homebuyers and all buyers of new builds, both effective Dec. 15.

Amortizing a mortgage over a longer period as compared with the current limit of 25 years would allow buyers to make lower monthly payments, pointed out CIBC. Meanwhile, raising the price cap on houses eligible for insured mortgages was inevitable at some point, given that price increases since it was originally imposed threatened to drop Canada's largest cities from the program.

The Canadian housing market in general, and in large cities in particular, is a tale of two markets, pointed out the bank. The detached -- low-rise -- segment of the market is operating at a reasonable level of activity despite high interest rates. However, the condo market is basically frozen largely because investors are basically out of the market.

As a consequence, there is little doubt the current change to regulations will speed up the recovery process of the housing market that was ignited by lower and falling interest rates, added CIBC. To prevent that from becoming "too much of a good thing,2 Caanada needs to match the additional demand with supply.

For many years, Canada used demand tools to deal with what is

essentially a supply issue. The core issue is the lack of supply

available to respond to the rapidly increasing population. In recent

years, there has been a dramatic change in attitude at all levels

of government, with supply becoming the focal point.

The additions to demand from these mortgage changes will make it even more imperative to deliver on policies aimed at inducing

more homebuilding.

For now, at least in the condo market, there is new supply waiting to be tapped. However, given the fact that the new condo construction activity is basically non-existent, the increased demand will eventually clear the market and reduce inventories to past level. At that point, the supply that is supposed to be built now won't be available until a couple of years from now.

The level of activity in the Canadian housing market is likely to continue to soften in the near term, estimated the bank.

But when the fog clears, it will become evident that the long-

term trajectory of the market will show even tighter conditions, it added.

Canada will need all levels of government to pull in the same direction to allow supply to catch up to where demand is headed, according to CIBC.