Bankrate

 

November 30, 2012

 

Housing: Canada is not the US

Expert says south-of-the-border style crash unlikely here

 

When making financial decisions, most people consult with their personal networks of friends, family and advisors. Professionals do that too, when trying to get a handle on which way the winds are blowing in stock, bonds and real estate markets.

 

But those who make their living in the investment world look at two other invaluable information sources. They follow developments in other countries, to identify trends that might occur here and they study history to look for lessons learned. As Churchill once said, “the further you look into the past, the farther you can see into the future.” For example in recent weeks, debate has been raging among residential real estate stakeholders as to whether Canadian housing prices will crash as they did in the United States following its financial crisis and ensuing recession. On the surface things look grim admits Benjamin Tal, an economist with CIBC World Markets.

 

After the US residential real estate market started going south, here in Canada, following a brief correction, house prices here just kept on rising, and Canadians just kept borrowing more money to pay for them. This drove prices up even more. The laws of gravity alone would suggest a correction is in order, particularly in markets such as Toronto and Vancouver which saw the biggest gains.

 

Canadians can’t just walk away

While Tal admits that this may occur, things are unlikely to unravel as they did south of the border.  “House prices in Canada will probably fall in the coming year or two,” he admits. “But any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the US and today’s in Canada.”

 

Tal cites several reasons for this. For one, Canadians cannot just walk away from their mortgages as they can in many US states. Here the banks will come after you and seize your other assets, including possibly your wages, to get you to cough up money you owe them. It’s a little rough, but it goes a long-way towards preventing home-buyers from borrowing too much.

 

Although these can quickly change, mortgage delinquency rates and debt-to-asset ratios here continue to look strong, as increasingly numbers of buyers shy away from variable rate mortgages, which would leave them vulnerable to sudden interest rate hikes. In fact the overall quality of Canadian financial institutions’ mortgage loan portfolios is far higher than it was in the US before the crash, when balance sheets there were littered with sub-prime and “Alt A” mortgage loans.

 

Tal notes that while there are similarities between what happened in the US and how things are unraveling here, there are differences too.

For example while Canadian debt-to-income ratios are high, they have been growing by only half as fast in the past three years as they did in the US prior to its housing crash.

 

Tal also notes that speculative mania in the US led to vast overbuilding, flooding the market with hundreds of thousands of more homes than could be absorbed by population growth. That’s happened a bit here too. For example as recently as last month, according to the Canada Mortgage Housing Corporation, housing starts came in at a seasonally adjusted annual rate of 204,107 units, while demand here is only in the 180,000 unit range. However the 13.4 percent supply-demand differential is far smaller than what we saw in the peak months down south.

 

Let’s hope he is right….

That said, although Tal’s arguments are convincing, nobody really knows how things will unfold. Short-term signs are inconclusive. For example although the housing start total noted above was high, it was actually down by 8.9 percent from the previous month, which Mathieu Laberge, the CMHC’s deputy economist attributes to decreases in urban centers in Quebec and the Prairie provinces.

 

The average selling price of existing homes sold last month for its part remained stable at $361,516, according to the Canadian Real Estate Association. On the other hand, Canadian real GDP, a key driver of housing demand, grew by just 0.6% annualized in the third quarter of 2012, after averaging 1.9% the three previous quarters.

 

In short, the best we can do is hope that Tal is right and a mild housing sector correction is all we will get.

 

Because when foreign investors, years from now, read back about us, to get clues on what might happen there, we want those stories to have happy endings.

 

peter@peterdiekmeyer.com

 

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