Above: Vancouver skyline. Photo by Kim Rose, click to enlarge.
Canada is in bubble territory
Bank of America Merrill Lynch analysts Sheryl King and Ryan Bohren believe Canadian housing is “in bubble territory” with commensurate “down-side risks remain despite an accelerating economy.” They are not, however, predicting a Canadian real estate crash.
How is Canada different than America?
The Canadian mortgage industry is quite different than the American structure. According to King and Bohren, there are four key differences that give Canadians somewhat of a safety net:
- We find government guaranteed mortgage insurance mitigates risk to financial institutions. Unlike the US where financial institutions were clearly over exposed and the solvency of insurance providers were questionable. 75% of mortgages in Canada are fully insured with Government guarantees and all mortgages with an LTV higher than 80% must be insured by regulated lenders.
- Legal recourse laws reduce the risk of households walking away from their mortgage and implicitly improve lending quality, unlike the US where reports of abandoned vacant homes were and remain rampant. By our estimation around 90% of mortgages are full recourse in Canada, creating a more lender-friendly environment.
- About 30% of the mortgage funding market has a federal government guarantee, which likely reduces the risk of a US style funding freeze. Indeed during the height of the credit crisis, the Government of Canada initiated a very effective Insured Mortgage Purchase Program which essentially kept the Canadian mortgage market functioning.
- Canadian’s have historically held lower leverage ratios than their US counter parts and tend to gravitate to more conservative mortgage options. Canadian household balance sheets have deteriorated and have been treading into more risky areas like variable rate mortgages, but sub prime lending remains a virtually non-existent market in Canada.
To our Canadian readers, do you think the market is in bubble territory or does your structure safe guard you from a bust?
Paul Indrigo via Facebook
March 23, 2011 at 4:28 pm
Cant speak for all markets (as no one actually can since all real estate is local) but the Toronto market is experiencing super low inventory and amazing buyer demand. The only risk takers are those buying new construction & paying over $700/sqft.
Jim Marshall
March 23, 2011 at 5:46 pm
In my area, prices are holding firm with strengthening demand and stable inventory. I was in the real estate business in the late 1980s (classic bubble), and this is nothing like the “bubble” they’ve been forecasting since 2007 or so.
Andrew McKay
March 23, 2011 at 5:59 pm
The real estate “headlines” up here always seem to revolve around Toronto and Vancouver but imply it’s the whole of Canada; it’s only towards the end of an article that you see the statements referred to these urban areas.
Check out this magazine cover from October 2008. The article actually gave examples only from British Columbia as far as I remember and 2 and 1/2 years later we’re still waiting for this crisis.
I think your post is exactly right that the mortgage industry in Canada and banking in general is much more conservative than the US and acts as a safety net for any nation wide crisis.
There may be “bubbles” in certain areas but move outside the big cities and real estate just plods along, steady but sure; in my small town anyway.
Andrew McKay
March 23, 2011 at 6:00 pm
Sorry forgot the magazine link:
https://www2.macleans.ca/2009/07/08/macleans-covers-gallery-2008/maccov10_06_08-2/
George O'Neill
March 23, 2011 at 9:08 pm
Recourse is definitely one of the reasons why Canada is not likely to suffer a US-style crash. I made a video blog about this very topic last August: https://oneillrealestate.ca/2010/08/20/why-a-us-style-real-estate-market-crash-wont-happen-in-canada/
Note that while 20% of US mortgages in 2010 were subprime, less than 5% in Canada are subprime mortgages.