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.
Showing posts with label housing bubble. Show all posts
Showing posts with label housing bubble. Show all posts
Friday, November 12, 2010
Monday, August 30, 2010
Perspectives: Canada Sidesteps the Worst of the Financial Crisis
August 30, 2010 BestWire Services Email Print Free Newsletter
Financial institutions in developed nations worldwide reeled from the effects of the financial crisis that began in September 2008. But Canada and its life insurers escaped the worst of the crisis.
Canada's financial-services regulatory framework and positive relationships between regulators and companies all played a role in insulating life insurers from the adverse effects of the recession, according to Frank Swedlove, president of the Canadian Life and Health Insurance Association.
But the nature of the Canadian economy mattered, too.
"The Canadian economy itself has proven more stalwart through the financial crisis, in part because it entered the recession in better shape fiscally, with less debt-to-gross domestic product and smaller deficits," said Dean Connor, chief operating officer of Sun Life Financial.
A primary reason for the Canada's economic strength was that the housing bubble--the centerpiece of the United States' recession--was not as big an issue in Canada, Connor said. "We have shorter-term mortgages, and mortgage interest is not tax-deductible, so you didn't see the kind of leverage in the housing market here that we did in the U.S.," he said. "And although the economy in Canada slowed last year, it has rebounded faster and is in pretty good shape."
To judge the housing markets' impact on insurers' portfolios in Canada and the United States, one need look no further than Sun Life's Canadian and American businesses. Because of mortgage-backed securities in the portfolio of Sun Life's U.S. subsidiary, the parent company in Canada had to make capital contributions to it the past two years, reducing financial flexibility for the group, according to July's A.M. Best Credit Report for Sun Life Assurance Company of Canada (U.S.).
Connor said commercial and residential mortgage-backed securities have been common and important investments for U.S. life companies, including Sun Life. Canadian life companies were invested in real estate and mortgages to a lesser extent, so their credit experience was much better, he said.
Stephen Irwin, vice president in the life/health ratings division of A.M. Best, said that the subprime and Alt-A types of mortgage securities so prevalent in the United States did not exist to the same extent in Canada because of better mortgage underwriting standards. Meanwhile, mortgage underwriting in Canada remained disciplined, said Richard McMillan, managing senior financial analyst at A.M. Best. And a few years ago, in reaction to weakening conditions in the housing market, the Canadian government refused to provide government insurance on longer amortizing loans.
"You could say there was some restraint by the regulators that helped to keep the market more reasonable than it was in the U.S.," he said.
As a result, Canada for the most part avoided a run-up in property values that occurred in many parts of the United States, McMillan said.
Other factors were also at play. One is the role played by the Office of the Superintendent of Financial Institutions, Canada's primary regulator and supervisor of federally regulated deposit-taking institutions, insurance companies and federally regulated private pension plans. Connor said OSFI oversees the operations of Canadian life insurers wherever they do business.
Financial institutions in developed nations worldwide reeled from the effects of the financial crisis that began in September 2008. But Canada and its life insurers escaped the worst of the crisis.
Canada's financial-services regulatory framework and positive relationships between regulators and companies all played a role in insulating life insurers from the adverse effects of the recession, according to Frank Swedlove, president of the Canadian Life and Health Insurance Association.
But the nature of the Canadian economy mattered, too.
"The Canadian economy itself has proven more stalwart through the financial crisis, in part because it entered the recession in better shape fiscally, with less debt-to-gross domestic product and smaller deficits," said Dean Connor, chief operating officer of Sun Life Financial.
A primary reason for the Canada's economic strength was that the housing bubble--the centerpiece of the United States' recession--was not as big an issue in Canada, Connor said. "We have shorter-term mortgages, and mortgage interest is not tax-deductible, so you didn't see the kind of leverage in the housing market here that we did in the U.S.," he said. "And although the economy in Canada slowed last year, it has rebounded faster and is in pretty good shape."
To judge the housing markets' impact on insurers' portfolios in Canada and the United States, one need look no further than Sun Life's Canadian and American businesses. Because of mortgage-backed securities in the portfolio of Sun Life's U.S. subsidiary, the parent company in Canada had to make capital contributions to it the past two years, reducing financial flexibility for the group, according to July's A.M. Best Credit Report for Sun Life Assurance Company of Canada (U.S.).
Connor said commercial and residential mortgage-backed securities have been common and important investments for U.S. life companies, including Sun Life. Canadian life companies were invested in real estate and mortgages to a lesser extent, so their credit experience was much better, he said.
Stephen Irwin, vice president in the life/health ratings division of A.M. Best, said that the subprime and Alt-A types of mortgage securities so prevalent in the United States did not exist to the same extent in Canada because of better mortgage underwriting standards. Meanwhile, mortgage underwriting in Canada remained disciplined, said Richard McMillan, managing senior financial analyst at A.M. Best. And a few years ago, in reaction to weakening conditions in the housing market, the Canadian government refused to provide government insurance on longer amortizing loans.
"You could say there was some restraint by the regulators that helped to keep the market more reasonable than it was in the U.S.," he said.
As a result, Canada for the most part avoided a run-up in property values that occurred in many parts of the United States, McMillan said.
Other factors were also at play. One is the role played by the Office of the Superintendent of Financial Institutions, Canada's primary regulator and supervisor of federally regulated deposit-taking institutions, insurance companies and federally regulated private pension plans. Connor said OSFI oversees the operations of Canadian life insurers wherever they do business.
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