CAAMP Chief Economist: "Risks are contained within Canadian mortgage market."
Today we will focus on a market report from CAAMP Chief Economist Will Dunn exploring the real estate market, and Canadian economy in general - a very informative article:
Recent media reports have expressed some concerns about potential risks for the Canadian housing and mortgage markets. One of the concerns being expressed is that Canadian consumers have been "over-extending" themselves thorugh mortgage borrowing. And, it has recently been suggested that the Canadian housing and mortgage markets might fall into a downward spiral like the one currently underway in the United States. Most Canadian economists, point to very substantial differences between the Canadian and US situations, which mean that risks in Canada are considerably lower than they have been in the US.
The Canadian Economy is Much Stronger
During this decade the Canadian economy has been much stronger then the US economy. The US economy peaked at the start of the decade. While it recovered somewhat during 2005 and 2006, the ratio has remained well below the prior peak. By contrast, the Canadian economy has shown increasing strength in this decade, and the employment-to-population ratio has set new record highs every year from 2003 to 2008. Moreover, to the extent that the US economy did improve at mid-decade, most of the growth was from the housing market - increased construction plus home equity take-out. There was a self-reinforced bubble in the housing market. In Canada, on the other hand, economic growth has been diversified and much more durable. The Canadian economy has done a very good job of generating highly qualified homebuyers; in the US, slower job creation has meant that there have been fewer good mortgage candidates. Credit quality has remained very strong in Canada but slipped badly in the US.
Some very interesting estimates from Scotiabank's Economics Department show that Canadians have reatined strong equity positions in their homes. Scotiabank estimates that in Canada, home equity is equal to almost 70 per cent of the values of residential property - in other words, total mortgage debt is only about 30 per cent of the total value of Canadian homes, and the equity position today (almost 70 per cent) is stronger that it was a decade ago (about 66 per cent). In the US, on the other hand, there has been sharp erosion of home equity, which began during 2001/02. By 2004 - well before the onset of the current US troubles - the equity position had already seriously eroded.
Low Debt Service Ratios in Canada
Most Canadian Homeowners have housing costs that are very well within their comfort zones. Data from 2006 indicates that more than 90 per cent of Canadian homeowners have GDS ratios below the traditional 32 per cent threshold.
Scotiabank has estimated that consumers' total debt service burden in Canada (as percentage of after-tax income) has not worsened during the past decade, with the burden staying close to eight per cent. In the US, by contrast, the debt service burden is almost twice as high (about 14 per cent) and the burden has increased significantly, from about 12 per cent a decade ago.
Very Few Canadians are in Arrears
The most recent data from the Canadian Bankers Association - which covers seven major banks - shows that just 0.27 per cent of residential mortgages were in arrears (three months or more, as of June 2008). This amounts to about 10,300 of of 3.85 million mortgages. This data from the Canadian Bankers Association covers about 85 per cent of all residential mortgages in Canada - it is possible that there is a different rate of arrears in mortgages from other lenders, The Bank of Canada estimates that about two per cent of sub-prime mortgages in Canada may be in arrears or foreclosure. In total, 20,000 to 25,000 Canadian homeowners might be in arrears, a veyr small fraction of the 8.05 million homeowners in Canada.
Will Dunning is the Chief Economist for the Canadian Association of Mortgage Professionals (CAAMP) and President of Will Dunnin Inc., a consulting firm that specializes in economic analysis.