Last week, Benjamin Tal, a senior CIBC economist, released a report explaining where the Canadian housing market is at, and mostly responding to the sceptics touting that our home prices are super inflated and that we are in for a U.S. style housing crash.
Our housing industry has been compared to the U.S. market ever since their problems began. He said that, “Not all is well with the Canadian housing system, 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.”
During the most recent years prior to 2006, qualifying for mortgages was quite easy, and the underwriting was near criminal and often times they were with a lot of mortgages even being called ‘Liar loans’. Nearly a one-third of mortgage originations in 2005 were subprime and Alt-A qualifying type mortgagors, while 20% of the entire U.S. mortgage market in 2006 was non-prime type mortgages. To add to its woes 80% of those clients had risky floating rates. In contrast, CIBC pegs Canada’s subprime market at just 7%.
In 2006, 33% of U.S. mortgages were already in negative equity positions, meaning they owed more on their mortgage than their homes were worth.
Tal said, “More than half had less than five per cent equity, thus making Americans highly exposed to even a modest decline in prices.”
In Canada only 15-20% of new mortgage originations has less than 15% equity, while the average Canadian has over 30% equity in their homes.
Millions of Americans got low rate teaser mortgages (and only had to qualify for the teaser rate payment) with rates that reset after two to three years, often times 2-3% higher than their original rate, meaning their mortgage payments could rise as much as 30-40% at reset time.
In 2006-2007 alone, $2 trillion dollars worth of U.S. mortgages reset to the much higher rates. In Canada, if you want to qualify for a variable floating rate then you would need to prove that you qualify for a higher rate in advance, currently about 2.50% higher.
Tal on debt to income ratios, “As any economist knows, the debt-to-income ratio is more a headline grabber than a serious analytical tool.” Various countries have had much higher debt-to-income rations than Canada and have experienced nothing remotely close to the U.S. crash.
In the past four years, Canadian credit scores have improved, by contrast in the four years leading up to the great recession, the ratio of risky U.S. borrowers rose by 10% and was 22% of the market.
All in all, Tal says that Canadian housing prices may fall slightly in some areas of the country due to some government mortgage rule tightening and a softening in the global economy but it won’t be to the extent or for the same reasons as our neighbours to the south. This is just another reason to be happy we live in this part of Canada where I don’t think we’ll feel much or any declines in pricing.
Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres-Regional Mortgage Group and can be contacted for more information or appointments at 403-343-1125 or emailed to jturcotte@regionalmortgage.ca.
