Let's not beat around the beautifully manicured bushes lining the perimeter of what you perceive is your house. And I say what you perceive is your house because the majority of "owned" homes are still mostly owned by whatever financial institution the owner got their mortgage from. Mortgage rules in Canada have changed in a way that supposedly makes it harder to buy a property, especially for first-time home buyers - like Generation Y.
Before looking at the practical effects of the changes in mortgage rules, let's consider the philosophy behind real estate. Your primary residence is, in almost every case, the most expensive thing you will ever buy in your lifetime. A lifetime that will likely involve 40+ working years (from age 20 to 60+) and, at most, a handful of different primary residences. It's the thing you'll likely pay the most interest on, spend the most money upgrading and protecting, and where you'll spend most of your life in. So, the importance of real estate is clear, and its high expense is warranted because of the unmatched comfort and security it provides.
Now, consider that the majority of Canadians likely see the importance and value of owning their primary residence, and add in the fact that the population has been steadily growing, which is the case in an immigration-friendly developed country like Canada (the opposite is true in a country with little immigration like Japan). House prices generally rise over time as demand only increases. This is despite other factors such as house improvements, gentrification of older neighborhoods, appeal of economic activity and the fact that some properties are simply investments. Now, couple that with the fact that prime Bank of Canada interest rates have been steadily dropping to 21% to nearly 0% over the past 35 years. What this low interest does is spur borrowing, as it is cheaper to service the debt on a loan with lower interest rates. This means mortgages have only been getting easier and easier to get as many people in the 80s could not afford to pay 21% annual interest on even a $70,000 mortgage (which would be equivalent to about $14,700 in interest in just the first year). However, if your interest rate is a mere 2%, about $1,400 in interest in the first year does not seem so bad, although as house prices have risen it would likely be closer to $6,000 in interest in the first year for a $300,000 mortgage.
What makes this situation a double-whammy is the ability to put as little as 5% down, resulting in a high loan-to-value ratio (LTV ratio) of 95% in addition to paying very little to borrow. The result is an increasing rate of property price appreciation, and when a particular investment class sees this type of exponential growth (as in the graph), it tends to lead to a 'bubble' that eventually must be corrected. Up until now, you could theoretically purchase a property if you had at least a 5% down payment and passed a "stress test" to see if you could afford what could be the lowest 5-year fixed rate available (which right now is about 2.5%). The crazy part is that this would be the same stress test that would be conducted even if you had a 20% down payment. The only penalty you would pay for putting 5% down is the mandatory Canadian Mortgage and Housing Corporation (CMHC) mortgage insurance, which adds up to 3.60% to your total mortgage amount.
The new rules will force those putting down payments of less than 20% to pass a more stringent stress test of 4.64%, which is the current "stress test" used if you were to apply for a floating (or variable) rate mortgage. Essentially, this means that if you are planning on making a down payment of less than 20% and would have been approved for a mortgage up to $300,000, for example, may only be able to be approved for a mortgage of up to around $260,000 now (these numbers will depend on your income and credit score, among other factors). So, reduced buying power is the legacy of the new rules, which will increase the time some people will rent and decrease the size/quality of property that some people can buy. There are, of course, a number of other changes that have other effects on mortgages, but for first-time home buyers, the more stringent stress test will be the most noteworthy factor to consider. Are the rules good? I think so. Were they implemented too late? Probably.
It begs the question of whether house prices can continue rocketing upwards with these new rules, the answer to which I think is no. Not a bubble burst necessarily, but what I would call a sensible descent. The more stringent requirements serve as a reminder to those wanting to settle down and own their slice of property that you can't have it all without the hard work. Save up and buy what you can afford.