Prices likely to drop but Canadian market very different than that of pre-crash U.S.
TORONTO, Oct. 30, 2012 /CNW/ - Canada is not poised for an American-style real estate meltdown, finds a new report from CIBC World Markets.
The report notes that while there are a number of factors that raise concerns about Canada's housing market, there are fundamental differences between the Canadian and U.S. markets that should see a soft landing for the real estate market here.
"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 CIBC Deputy Chief Economist Benjamin Tal.He notes that while the debt-to-income ratio in Canada just broke the American record set in 2006, "this ratio is more a headline grabber than a serious analytical tool. There is a list of countries with comparably higher debt-to-income ratios, which did not experience anything remotely resembling the recent U.S. experience." Mr. Tal says we should pay more attention to the speed at which the debt-to-income ratio is growing. "Here the picture looks a bit less alarming. Comparing the three years heading into the U.S. crash to the past three years in Canada reveals that the debt-to-income ratio in Canada has been rising at half the speed seen in the pre-crash U.S. market." The strong growth in indebtedness south of the border was partially fueled by speculative activity in the housing market - something we've seen far less of in the Canadian market. In the decade leading to the crash, housing starts in the U.S. exceeded household formation by nearly 80 per cent. On average, over the past decade, the gap in Canada has been only 10 per cent—with most of the excess seen in cities such as Toronto and Vancouver. Another key difference between Canada and the U.S. is in the quality of mortgages. The distribution of credit scores has not changed dramatically in the past four years in Canada which is a very different story to what happened in the U.S. during the four years heading into the recession. Stateside, the proportion in the risky category rose by more than ten percentage points and accounted for 22 per cent of the overall market. But credit score does not tell the whole story says Mr. Tal. He notes that many of the troubled mortgages in the U.S. were sold to borrowers with an acceptable credit score but who did not satisfy the underwriting rules for prime loans because they were unable or unwilling to provide full documentation on their mortgage applications. In 2006, these non-prime mortgages accounted for no less than 33 per cent of originations and close to 20 per cent of outstanding mortgages.