Donald sent in a couple of bank reports on the Canadian housing market that were just published. Yesterday saw the release of Scotia Capitals report “Is There a Canadian Housing Bubble?‘, while this morning RBC released their Housing Trends and Affordability report. The Scotia report is remarkable for putting the question right out there in the title, but their conclusion seems to be “yes, maybe there is a Canadian housing bubble, but thanks to mortgage innovation, it probably wont bust for another year or so”.
There is no question that Canada is perhaps curiously off-cycle compared to other countries by way of pursuing mortgage innovation while other countries have curtailed such activities. Stronger bank capitalization, more prudent regulatory and managerial oversight, a century’s worth of sounder policies relative to countries like the US in carving out a structurally sounder banking market, work since the mid-1990s to craft a relatively much sounder fiscal environment, and among the more pro-active central banks have all set decent backdrop within with such innovation can occur. Thus far, most of the innovation has been classically Canadian in a conservative sense, but there’s no objectively doubting that the market is changing.
Canadian innovation really only began, however, after the current federal government liberalized the mortgage insurance market in the Spring of 2006. Material innovation has only been characteristic of the Canadian market for 2-3 years, but it is already having a significant impact.
And their note on how amortization terms are changing:
In terms of amortization periods, it was 25 or bust until three years ago when 30, 35, and 40 year amortizations became available. Now, after just three years, 18% of outstandings are over 25 yrs. 10% are 35-40 years. As a share of new mortgage originations, 47% of mortgages originated for new purchases in the past year have had amortizations longer than 25 years, and over 60% of that share has been in 35 and 40 year mortgages. One can no longer get an insured 40 year mortgage in Canada, but uninsured 40 year amortizations are still available.
Remember, this is for all of Canada, we’ve heard anecdotal evidence from banks that greater than 50% of new buyers in Vancouver are opting for longer amortization.
The Royal Bank report remarks less on market forces and steers clear of any ‘bubble’ predictions. They do note that their ‘affordability’ trends are declining again, particularly in Toronto and Vancouver.
This near-frenzied tone to the market is occurring despite still historically poor, and now deteriorating, levels of affordability. In the third quarter, RBC’s affordability measures for Vancouver worsened for the first time since early 2008, rising between 1.7 and 4.3 percentage points. These increases were, in fact, the biggest among major cities in Canada. Even though the affordability measures fell substantially during 2008 and early 2009, they remain well above long-term averages.
I’m not sure to make of all the cautionary notes coming from banks about housing lately – From INGs CEO warning about a Canadian housing bubble to these recent reports. It would appear that this attention to the issue should avert some of the ‘nobody saw this coming’ comments that we saw out of US banks and lenders when their market crashed. One thing is for sure, as long as the CMHC is picking up the risk there’s no way these banks are going to stop handing out big home loans.