Benjamin Tal, deputy chief economist of CIBC World Markets, recently released a report to calm domestic and foreign investors who fear that Canada’s housing market is collapsing.
He acknowledges that the persistent upward trend home prices is a reason to be nervous (see right).
However, he notes there are substantial differences between the current state of the Canadian housing market and its American counterpart circa 2006.
Even under a worst-case scenario, a Canadian housing market crisis, wouldn't be on the same scale as the American housing crisis.
Tal provided four points with charts to support his thesis.
Canada's housing market has very little speculation
The ratio of housing starts to household formation over the past ten years is significantly lower in Canada than in pre-crash U.S.
"On average, over the past decade, housing starts in Canada exceeded household formation by only 10%— with most of the excess seen in cities such as Toronto and Vancouver. In the US, the gap during the decade leading to the crash was almost 80%."
In short, the supply of houses better reflects the real demand.
Source: CIBC World Markets
Borrowers have less sensitivity to interest rate spikes
The share of variable rate mortgages (a mortgage without a fixed rate) in Canada has dropped substantially in the short-term, and remains lower than the percentage of VRMs in the precrash U.S. market.
This means that rising interest rates won’t be accompanied by rising mortgage payments for the vast majority of Canadian borrowers, lowering the risk of default.
Source: CIBC World Markets
Credit scores in Canada have improved since the recession.
"The distribution of the credit score in Canada has not changed dramatically in the past four years with some increase in the relative proportions of both sides of the risk spectrum. That is very different than the experience seen in the US in the four years heading into the recession. The proportion of the risky category rose by no less than ten percentage points and accounted for 22% of the market."
Source: CIBC World Markets
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