Canada’s housing market is “relatively insulated” from a US-style crash and Canadians might simply need to get used to high home prices, according to the chief economist at Chartered Professional Accountants (CPA). In his report The real story behind housing and household debt in Canada: Is a crisis really looming?, economist Francis Fong examined the risks and vulnerabilities of the Canadian housing market and whether the widespread rise in household debt combined with sky-high home prices meant that the often-predicted price crash was imminent.
Fong compared the characteristics of the Canadian housing market with those that caused the US subprime crisis of 2008. He found that “Canada does not share the credit quality issues that plagued the US housing boom-bust cycle, such as the prevalence of subprime mortgages… Most critically, Canada’s housing market has not been driven by growth in low credit quality mortgages, despite the impression given by rapid price gains… In contrast, [Canadian] credit quality has actually improved alongside the growth in home prices.”
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Fong cited Equifax data that found the proportion of homebuyers with “very good” or “excellent” credit scored increased from 81.5 per cent in 2013 to 84 per cent in 2017. Among first-time homebuyers, the improvement was even more marked, rising between 2013 and 2017 from 79.4 per cent to 82.4 per cent. Fong said, “This suggests that home price gains are being driven by those who can actually afford such prices.” Fong also pointed out that 82 per cent of Canadian mortgages are uninsured, which means that the buyer had at least a 20 per cent down payment. He added, “The risk is further lessened by a much higher concentration of mortgage activity in Canada among fewer financial institutions and the way those institutions use securitized mortgages.”
However, Fong stressed that there were still some risks to the Canadian housing market. He wrote, “A growing share of the mortgage market is made up of less-regulated financial institutions beyond the big banks. In addition, recent data show that nearly a quarter of new borrowers hold debt exceeding 450 per cent of their income – a level far beyond the 170 per cent debt-to-income ratio at the national level that is normally quoted – making them significantly more vulnerable to the current rising interest rate environment.”