I guess it's not much use saying that something should have been done sooner. To some extent, you have to give the new federal government credit for making an attempt to put a lid on what so many experts fear is a Canadian property bubble.

The debate now is what impact the move to increase down payments on houses worth more than $500,000 will have.

Is it too much? Enough to pop the bubble that so many people have identified? Or, at the other end of the spectrum, will it be too little to have any serious impact on a mortgage market that is constantly finding fresh ways to entice new buyers?

As always when trying to solve real-world problems, the government is making policy in uncharted waters. Unfortunately, the only way to be sure of the effect is to wait a few months and see what happens.

At first blush the new rules seem targeted at the richer end of the market. Ostensibly, houses selling for less than $500,000 will be unaffected by Finance Minister Bill Morneau's increase in down payments.

The new rules are structured so minimum down payments begin to rise gradually as the selling price moves above that point.

Not just for the rich

Unlike other parts of the country, in the two most overpriced Canadian real estate cities, Toronto and Vancouver, homes priced over half a million aren't just for the very rich.

A row of detached single family infill houses in the Bloor West area of Toronto, each listed at nearly $1.3 million. No one is sure how the new federal morgtage rules will affect prices. (Don Pittis/CBC) Even for houses listed for more than $1 million, sellers offer deals that seem to be aimed at first-time buyers.

Just days ago the C.D. Howe Institute, a Canadian economic think-tank, warned that many first-time buyers are so overextended that they are teetering on the edge of ruin.

"The share of households that have no financial buffer has been going up. There's more financial vulnerability now than there was before," said C.D. Howe economist Craig Alexander.

Many studies have reported that young people are already getting large chunks of their down payments from the Bank of Mom and Dad. That means even the down payment can be an invisible loan that will need to be repaid, especially if it comes from a nest egg the parents will need for their extended retirement.

The question that really cannot be answered yet is whether the new rules will have the desired effect. Clearly the government wants to cool the market without crashing it, aiming for the storied soft landing.

According to efficient-markets theory, any price rise will have a slowing effect. But having just read Richard Thaler's new book on behavioural economics, Misbehaving, I fear the power of psychology will have much more effect on how buyers respond.

Popping or reining in a bubble?

If new buyers really are willing accept the kind of danger that C.D.Howe is warning about, it may be they will just find new ways to overextend themselves.

As mentioned previously, quoting an Economist writer discussing a different kind of market altogether, "speculative fervour thrives on expectations of rapidly rising prices — rising rapidly enough that buyers find it rational to make bets they could not normally afford."

While a case could be made that price rises will not be enough to rein in a bubble, in a psychology-driven market, it is not hard to make the opposite case — that is, that increased mortgage costs may be enough to pop the bubble, if one does indeed exist.

Maybe in combination with a rule to push more risk onto mortgage lenders, plus an expected rise in U.S. interest rates, the entire housing market may turn from optimism to pessimism.

Certainly the Canadian Real Estate Association has expressed concern that markets outside the target price ranges and regions could be affected.

"It could turn buyers and balanced markets into distressed markets, at a time when our economy is struggling, including in places that are facing economic headwinds from the collapse in oil prices," said CREA's chief economist Greg Klump in a release Friday.

CREA has repeatedly insisted that the Canadian housing market is not in bubble territory. If that's true, the government's attempt to take a little heat out of the market will merely discourage a future bubble from growing.

On the other hand, if the many critics and international bankers are right about the Canadian property market, that it has already inflated into a bubble ready to pop, then the time to intervene was years ago.

But we can hardly blame the current government for that.

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