The real risks to Canada’s housing market

With increasing levels of household debt and home prices that remain high in some regions, Canadians might harbour fears of a U.S.-style housing crash. But trends point to a relatively resilient Canadian housing market, finds research from CPA Canada. The research report also identifies a shadow side to such resilience.

On the plus side, credit quality in Canada is relatively high, with no prevalence of the subprime mortgages that plagued the U.S.

Canadian Mortgage and Housing Corporation data on insured mortgages indicate that the share of borrowers with high credit quality has risen to an average of 88% as of the third quarter of 2017 from 65% between 2002 and 2008.

Further, the share of borrowers with lower credit quality has fallen dramatically, particularly for those with the lowest credit scores, whose share fell to nearly 0% last year from 4% in 2002.

Also in Canada’s favour relative to the U.S. is a stricter regulatory regime and a higher concentration of mortgage activity among fewer financial institutions—and the way those institutions use securitized mortgages, says the report.

For example, more than 40% of securitized mortgages in Canada are retained by the financial institutions themselves for regulatory purposes. Thus, the incentive for the institutions to originate low credit-quality mortgages is lessened.

Still, housing risk exists, says the report, such as the increasing proportion of mortgages at non-banks. For example, these less-regulated lenders might not conduct the same level of due diligence on borrowers relative to the banks, it says.

Also, some Canadians have rising debt-to-income ratios, with nearly one-quarter of new borrowers holding debt exceeding 450% of their incomes—a particular concern in an environment of rising rates.

Overall, systemic risks appear well-contained, the report concludes, and the banking system is better capitalized than before the financial crisis. As a result of Canada’s relatively healthy financial system, the current level of home prices might be justified and significant downward pricing pressure could be unlikely.

Therein might lie the real threat, says the report: perhaps homes will never be affordable for those already priced out of the market.

For full details, download the CPA Canada report.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.