For the past 4 years I have been increasingly concerned about unsustainable trends in the Canadian housing market.
As I have mentioned many times, Canadians have been lulled into a false sense of security by mortgage rates that are now at their lowest level in 75 years. Our government mortgage agency CMHC has been underwriting the vast majority of Canadian mortgages for the past few years. Between 2007 and 2009 CMHC underwrote nearly 90% of all Canadian mortgages. They were able to fund this by issuing Mortgage Back Securities: the same weapon of mass destruction that eventually blew up US housing and credit markets in 2007.
A new 51 page report from Alexandre Pestov at the Schulich School of Business examines these trends in the Canadian market and comes to some stark warnings:
– “Bubbling” in the Canadian housing market over the past few years was no less intense in Canada than it was in the US
– the extent of the run up in major Canadian cities was at par with the 20 largest US metropolitans
– housing affordability in the four largest Canadian cities (Vancouver, Toronto, Montreal and Calgary), is currently at par or worse than that of US hotspots in their boom
– Canada has experienced the same real-estate bubble as the US did. It just hasn't burst yet:
“Canadians own no favours to Steven Harper, Jim Flaherty and Mark Carney. They did not prevent the bubble from bursting; they merely postponed it. There are no miracles in how the Canadian housing bubble managed to stay afloat. However, at the end, more homeowners will suffer from the upcoming housing market correction. The ballooning national debt due to the careless sub-prime lending of CMHC and wasteful programmes designed to re-inflate the housing bubble will be shared by all Canadians. According to the CMHC financial statements, the corporation has only $8 billion equity backing $200 billion in assets8. Once defaults rise, the Canadian government will have no choice, but to bail out CMHC. The scale of bailout will likely dwarf all other financial emergency responses done by the Canadian government in the history of Canada. Higher national debt, increased taxes and reduced social services will be the direct result of the Harper government’s intervention to maintain an illusion of the Canadian housing market health.”
Canadian mortgage rates will trend up as the government withdraws its emergency interventions. Many over-levered Canadians will face mortgage payments which become impossible to service. We are not nearly through this challenging period.
The full report is worth reading here: The Elusive Canadian Housing Bubble