Market for homes close to balanced

By JAY BRYAN, The Montreal Gazette November 9, 2010

Mortgage debt in Canada climbed by 7.6 per cent in the past year to exceed $1 trillion -a figure that's sure to spark new worries about a housing bubble in Canada.

But a look below the surface of this number is far more reassuring.

First, the sheer amount of mortgage debt sounds daunting, but what's really important is how fast it's growing. It turns out that this growth has slowed a good deal from a trend rate of 10.7 per cent in recent years, an encouraging sign. The forecast is for a further downshift.

As well, it's hard to find signs of bubble behaviour or of a financial squeeze on homeowners.

Few Canadian homeowners are speculating on housing and most have a fat equity cushion in their properties. Better yet, most could afford monthly payments of at least $300 above their current ones, according to a new survey.

This information is courtesy of an outfit that represents many of Canada's mortgage brokers and insurers, the Canadian Association of Accredited Mortgage Professionals, which has just published a wealth of housing-market intelligence in its annual report.

Bottom line, CAAMP president Jim Murphy says in a statement accompanying the report: "Canadians are being smart and responsible with their mortgages. They are building equity in their homes and making informed, long-term mortgage decisions."

This sounds like one of those motherhood statements that you expect from sales-oriented organizations like your local real-estate board, but the interest of mortgage lenders is quite different, giving Murphy's optimism a bit more credibility.

His members would suffer big losses if there were a big deterioration in people's ability to pay off mortgage debt - a crucial factor that drove the 30-per-cent collapse in U.S. home values over the past several years.

And it's not just CAAMP that's unconvinced about any bubble. At BMO Capital Markets, senior economist Sal Guatieri has just taken another look at Canadian home valuations and concluded that the average price across the country is too high, but not by a lot.

At the peak of the home-buying frenzy late last year, Canadian prices were overvalued by maybe 18 per cent, he estimates, but this has diminished to about 11 per cent as the market cooled and incomes edged up. (His calculation is based on the long-term relationship between prices and personal incomes.)

With prices still richer than incomes would normally support, there's some pressure for further cooling in prices, Guatieri believes, but he doesn't see a drop of more than five per cent.

That's partly because incomes continue to rise, helping to narrow the gap. It's important to remember that Canada's very low mortgage interest rates can support prices above the average level for quite a while, providing time for the slow advance of incomes to do most of the rebalancing.

Will Dunning, the chief economist at CAAMP, has a similar outlook. As demand for housing cools, he expects to see a sharp drop in new housing construction (a forecast that looked exactly right when we saw yesterday's news of a nine-per-cent drop in housing starts last month), but little pressure on resale prices.

Dunning predicts that the average Canadian home price for 2011 will be a modest 3.9 per cent lower than in 2010, simply because of price declines that have already affected some markets.

But this annual average represents past price movements. He thinks the trend in 2011 and 2012 will be one of small price gains, just enough to offset inflation.

That's because the balance between homeowners listing properties for sale and people looking for homes to buy has shifted back toward buyers, but not nearly far enough to kneecap prices. In Dunning's view, the market these days is just about balanced.