Canada's Condominium Magazine
CIBC Deputy Chief Economist Benjamin Tal. His latest report on the Canadian housing market says there is no need to worry about a US-style meltdown here.
There’s yet another report out, this one from CIBC, reassuring Canadians that we’re not like the Americans at all. At least when it comes to debt. While America experienced a real estate meltdown from which it is now emerging, no such fate is in store for us. According to Benjamin Tal, deputy chief economist at CIBC and the report’s author, the Canadian housing market is “very different” from what was happening in pre-crash America.
“To be sure, house prices in Canada will probably fall in the coming year or two, but any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market,” says Tal.
One of the conditions that has got a lot of attention lately is the rising debt-to-income ratio among Canadians. Tal dismisses this a “headline grabber” and says it is not really a “serious analytical tool.” Many countries have higher debt-to-income ratios than Canada, he says, and they have not experienced a US-style crash.
What made the US situation so dangerous was the speed with which the debt was accumulated there, fueled, says Tal, by speculative activity in the housing market. The Canadian debt-to-income ratio has been rising at half the speed of the US. And further, they built many more houses than were needed in the three years leading to the crash. Housing starts exceeded household formation by 80 per cent, while in Canada the gap between need and housing starts is more like 10 per cent.
And let’s not forget the quality of the mortgages. In the US, the proportion of “risky” mortgages given out in the four years leading to the crash grew by more than 10 percentage points, Tal says, accounting for fully 22 per cent of the overall mortgage market. In Canada, there has been no such increase in risky mortgages.
“An astonishing one-third of mortgages taken out in 2005 and 2006, before the drop in prices, were in negative equity position, and no less than half had less than five per cent equity, making them highly exposed to even a modest decline in prices,” says Tal. “In Canada, the negative equity position is nil, and only 15-20 per cent of new originations have an equity position of less than 15 per cent. Furthermore, we estimate that the non-conforming market is currently at around seven per cent of mortgage outstanding, up from five per cent in 2005 but dramatically below the over 20 per cent seen in the U.S. at the eve of the crash.”
If it had not been for the proliferation of subprime mortgages, the US meltdown would have been a “soft landing,” says Tal.
Between mid-2004 and mid-2006, millions of Americans took mortgages with low “teaser” interest rates. When the teaser period expired, those millions of homeowners felt the full impact of two years’ worth of monetary tightening virtually overnight.
“The reset of no less than $2 trillion of mortgage debt in 2006 and 2007 was no doubt the trigger to the U.S. housing crash. Such a potential trigger does not exist in Canada with mortgage rates likely to rise gradually, allowing borrowers to adjust over time.”