The biggest risk to Canada’s housing market has always been its most obvious risk: a high household debt-to-income ratio.
A report released on Monday by CPA Canada (Chartered Professional Accountants Canada) cited a recent Bank of Canada study estimating that the total household debt-to-income ratio exceeds a record 170 per cent. But it also says recent research indicates the share of new borrowers taking on uninsured mortgages with over 450 per cent debt-to-income was 22 per cent between 2014 and 2016.
“The vulnerability of these households to a rising interest rate environment has come into question since the Bank of Canada began hiking interest rates. Mortgage rates are roughly 100 basis points higher since the summer of 2017 … with more hikes likely to come slowly over time. This could potentially force a significant number of households into a difficult financial position, which could then trigger a broader slowdown in both housing and economic activity. This risk is further raised by the possibility that escalating trade tariffs with the U.S. will force a slowdown in economic activity and an increase in the unemployment rate,” said the CPA report The real story behind housing and household debt in Canada: Is a crisis really looming?, by the association chief economist Francis Fong.
But in the report, Fong points out the difference between Canada today and what happened in the 2008-2009 U.S. housing market bubble and crash. Fong said the underlying trends point to a Canadian housing market that is different and likely more resilient than it might first appear.
“Beyond prices and debt levels, Canada shares far fewer similarities with the U.S. than you might think. This becomes very apparent when you look at just one measure; credit quality,” said Fong.
The key factors in the U.S. collapse were relatively lax regulation and the prevalence of sub-prime mortgages issued to homebuyers with low-credit quality who couldn’t afford to keep up payments. Credit quality is a measure of an individual’s ability to repay debt, added the CPA.
“In contrast to the situation a decade ago in the U.S., the Canadian Mortgage and Housing Corp., which insures Canadian mortgages in cases where buyers cannot make a 20 per cent down payment, says the number of borrowers with high credit quality has risen from 66 per cent in 2002 to 88 per cent in 2017. In turn, the number of low-credit-quality buyers shrank from 17 per cent to three per cent over that period,” said the association.