Canadian housing market faces a soft landing despite slowdown, bankers say

The bursting of the U.S. housing bubble is considered a major cause of the credit crunch that swept Wall Street and then the global economy in the fall of 2008, after interest rates on sub-prime mortgages rose and defaults soared.

By contrast, sub-prime mortgages have been less common in Canada and real-estate prices have trended upward for the most part — except for a few months during the 2008-9 recession and in some economically disadvantaged areas.

“Our expectation is that the overall real estate market in Canada is still relatively solid,” Royal Bank (TSX:RY) CEO Gord Nixon said Tuesday.

Despite reports that suggest Canadian housing is in crisis, he said the pullback is limited to a couple of markets, notably Vancouver.

“We have seen a slowdown in sales and we’ve certainly seen a slowdown in mortgage demand but price levels are relatively stable,” he added, noting that by most metrics other than debt to disposable income indicators are in line with historic standards.

“So our expectation is we’ve got this sort of soft landing scenario on the real estate side.”

The head of Canada’s largest bank said he expects RBC’s consumer lending growth will slow to mid single digits but it should see an increase in commercial loans.

Nixon said the bank has relatively small exposure to the condominium market at $1.2 billion of a $700 billion loan portfolio and has requirements that protect it from troubled lenders.

“We’re not overly concerned with respect to condo itself because our relative exposures are quite small — on a relative basis, the smallest of the Canadian banks,” he said.

However, Nixon noted that a significant decline in the overall real estate market would have broader impact across the economy, which would hurt the banking industry.

While Nixon expressed confident with most parts of the bank’s businesses, he said RBC will focus on improving its underperforming Caribbean operations.

Bank of Montreal (TSX:BMO) CEO Bill Downe told the conference that BMO limited its exposure to the Canadian condo construction market at $700 million after watching some of the problems surface in the United States in 2007 and 2008.

The bank is active in the U.S. mortgage lending market in the Midwest through its Harris Bank subsidiary.

He doesn’t expect Canadian homeowner debt to keep growing at previous levels but not an “outright collapse in the market.”

“In fact, house prices may just stagnate. Condominium prices may just stagnate for a couple of years. And that’s the definition of a soft landing,” Downe said

Downe predicted the overall U.S. housing market will show considerable strength this spring, stimulating commercial loans.

After a strong fourth quarter with U.S. mortgages, Downe’s anticipating that the American economy will be much stronger this year, which will put upward pressure on interest rates in both countries.

“I think the U.S. economy is going to perform much better in 2013 than people are anticipating,” he said.

Scotiabank CEO Rick Waugh said he also foresees a soft landing for the Canadian condo market, which poses the greatest risk.

He watches 90-day delinquencies very carefully for signs of deterioration.

“It’s elevated above 2007 levels but only a bit…it probably will come up a little bit but at levels that are well within our risk appetite.”

The Scotiabank (TSX:BNS) president denounced suggestions that Ottawa could privatize the Canada Mortgage and Housing Corp., which he described as an integral part of the Canadian housing system that helped to ensure the country survived the housing crisis unlike a similar U.S. entity.

“It ain’t broke, it worked, it met the biggest stress test in our lifetime. Why fool around with it? It’s not a Fannie Mae.”

Meanwhile, Waugh said the bank will make a decision this year on whether to stick with its plans to pursue wealthy middle class Chinese after agreeing to pay $719 million for slightly less than a 20-per-cent stake in Bank of Guangzhou.

He said it’s a very intriguing opportunity that the bank has been focused on for a year and for which it raised the required capital.

However, he warned the bank won’t wait forever to close the transaction.

“There’s a world of opportunities. We’ll find a place for it if that one doesn’t go but we can’t wait forever.”

Ed Clark, president of TD Bank (TSX:TD), said he remains pessimistic about Europe’s ability to turn its problems around and said Canada’s long period of growth that surpassed the U.S. is over, assuming politicians don’t make decisions to reduce short-term expansion.

“I’m more positive on the United States than I am on Canada in growth numbers.”