Talk of Looming "Mortgage Crisis" in Canada Unfounded

Doomsayers, prompted by a continual stream of bad news from the United States about the U.S. housing and mortgages market, continue to predict that Canada is next on the hit list of countries to be sucked into a mortgage and housing crisis triggered by events south of our border. Many of these sobering pieces fail to take into account that the current woes in the United States are very much a made-in-the-U.S.A. phenomenon sparked to a very large degree by ultra-lax lending practices stateside.

The latest such piece ("Mortgage Crisis May Be Looming for Canada", published July 17th) comes from the Edmonton Journal, which is perhaps no coincidence as the Edmonton real estate market was one of the hottest in the country as much of Alberta and Saskatchewan rode the crest of an economic prosperity wave on the back of a booming energy sector. Now with real estate markets across the country easing back from the largest Canadian housing boom since the Second World War, markets in Edmonton and across Alberta have fallen more dramatically than elsewhere in Canada. Alberta markets, of course, had farther to settle to get back into equilibrium as we move from one phase of the economic cycle to the next.

The article cites as its sole Canadian source a recent report from Export Development Canada, the federal crown corporation charged with building overseas markets for Canadian products such as the lumber used in new home construction worldwide. The report from Export Development Canada tracks plummeting new home construction starts in the U.S. and Europe (and which mentions, peripherally, Canadian new home starts) from which the Journal concludes that it could be Canada's turn for a "housing crisis". This is the flimsiest of evidence on which to make such a startling and alarming conclusion, and it ignores both the federal governments own analysis of the state of Canadian new home construction, and its own analysis of the causes of the U.S. housing woes.

The latest survey of Canadian new home construction from the Canada Mortgage and Housing Corporation indicates that housing starts remained high in June despite a decrease in overall housing starts. But further, it shows that housing starts declined in all urban areas in Canada except Ontario, where a moderate increase in home construction was fuelled by a surge in multiple-family (i.e., condominium) new home starts rather than single-family homes.

The analysis in the Journal is largely based on the Finance Department's recent announcement that as of October 15th, federally-backed mortgage insurance through the CMHC and other private mortgage insurers will no longer be available for mortgages with extended amortization periods over 35 years and new home buyers will be required to put up a 5% down payment when buying a home to qualify for federally-backed mortgage insurance. The recent move by the feds to further tighten Canada's already conservative lending standards reflects a level of prudence in mortgages and lending standards that was not reflected in a much more loosely regulated banking system in the U.S..

Indeed, the Journal reports that as of October 1st, 2009 the U.S. Federal Reserve Board "will require lenders to verify a borrower's income in determining repayment ability, to take a lender's ability to repay a loan from income into consideration, to establish escrow accounts for property taxes and homeowners insurance in certain cases, and basically to advertise rates and payments with clear notice if a rate is not fixed." These are standards that Canadian lenders have long adhered to, and standards that were only strengthened by the Finance Department's further tightening of lending rules for the banks and trust companies that write the majority of Canadian mortgages.

We are now seeing the chickens come home to roost in the U.S. where nation-wide banks are facing liquidity and credit pressures not experienced since the Great Depression. The third largest U.S. bank failure ever occurred last week and the U.S. government has moved to backstop Fredddie Mac and Fannie Mae, the two largest holders of U.S. mortgage debt. The ongoing housing and credit crunch in the U.S. is having, and will no doubt continue to have, a profound impact on Canada's economy. However, that effect has been considered and acted upon, both by the Finance Department with its recent tightening of already conservative lending practice, and most recently by the Bank of Canada which continues to tread a fine line between fostering a stimulative economic climate and fighting off inflation pressures from high gas and commodity prices by keeping its main lending rate at 3% - historically, a relatively low lending rate.

To suggest that Canada is courting a made-at-home mortgage crisis because one regional market continues to generate increasing new home construction starts - and that in more affordable, multi-family residential units - while much differently regulated markets in the U.S., U.K. and Europe experience significant declines in housing starts and overall housing prices is to go to court with very little evidence. A wider survey of the Canadian economic picture, such as that released by the Bank of Canada explaining its interest rate decision - suggests that the Canadian economy will continue to grow albeit very moderately through 2008 and 2009 before righting itself in 2010, unlike the U.S. which continues to struggle through a made-at-home recession. And, generally, as goes the economy, so goes the housing and mortgages market.