The Canadian housing market is set for a downturn; but with a fundamentally healthier mortgage market than that of the U.S., the slump will be far less severe than the one occurring south of the border, says a new Scotia Capital Inc. report.
The best days for the Canadian housing market are behind us, and moving forward, there will be lower volumes of new home construction and resales along with fairly modest erosion of house prices, state Scotia Capital economists Derek Holt and Karen Cordes in the report.
Calgary and Edmonton will be most exposed to the weakening market, the report said.
But the experience ahead cannot be compared to that of the U.S. for a number of reasons. In Canada, subprime mortgages make up just 5% -6% of mortgages outstanding, three times less than the peak in the U.S.
Other types of mortgages also differ drastically between the two countries. For example, resets in adjustable rate mortgages that have caused problems in the U.S. are much less sudden in variable rate mortgages, the Canadian product parallel.
“The shock effect from payment resets in Canada is nowhere close to what has caused much of the problem in the U.S.,” the report states.
Canadian mortgages are also funded in a completely different manner, the report notes.
Most mortgages are held on balance sheet in Canada and only 24% have been securitized. Most that are securitized are done so through the Canadian Mortgage and Housing Corp., a Crown corporation with explicit government backing.
With Canadian financial institutions less reliant on short-term lines extended by other financial institutions, there is also less exposure to short-term swings in market sentiments than in the U.S.
Underwriting standards also continue to be much more prudent in Canada than in the U.S., and enforcement of mortgages is tilted more in favour of lenders than borrowers — the opposite of which is true in the U.S..
The report also pointed to differences in the two countries’ debt levels as a key factor in the health of the market. In the long run, debt growth in the U.S. has exceeded that in Canada, which has resulted in a generally higher household-liabilities-to-income ratio south of the border.
In Canada, the level of debt as a share of household assets is also much lower than the U.S., with Americans having used almost 30% more debt to purchase assets than Canadians.
“Clearly, Americans and Canadians have different debt tolerances,” the report stated.
Canadian housing market on the way down: Scotia Capital
But with a fundamentally stronger mortgage regime, the downturn will not be as severe as that of the U.S.
- By: Megan Harman
- September 28, 2008 September 28, 2008
- 10:23