Canada’s financial regulator is growing worried that Canadian banks are following their American counterparts into the “subprime” mortgage market that blew up the financial system in 2008.
According to documents obtained by Bloomberg under access to information laws, the Office of the Superintendent of Financial Institutions (OSFI) is concerned Canadian banks are becoming less strict in their issuance of mortgages, handing out house loans to people who can’t prove their income and to recent immigrants.
These loans “have some similarities to non-prime loans in the U.S. retail lending market,” the OSFI reportedly wrote.
However, the situation in Canada is not as out of hand as it had become in the U.S. prior to the housing market collapse. At the peak of the U.S. housing bubble, in 2006, about one-third of all mortgages issued in the U.S. were in the “subprime” category; by comparison, only about five per cent of Canadian mortgages go to recent immigrants and people with undocumented incomes.
“It just speaks to the general easing in lending standards, which has contributed to a booming housing market,” economist David Madani of Capital Economics told Bloomberg.
OSFI’s concerns mirror those of many other market observers, who say Canada’s real estate market is in for a downturn. Capital Economics predicts a 25-per-cent correction for housing, though others suggest the market could be in for a softer landing than that.
Sherry Cooper, chief economist at BMO, says near record-low interest rates will keep the housing market from bursting.
“In our view, the [Canadian] national housing market is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a ‘pin,’ ” Cooper wrote in a report Monday.
The ratio of household debt to income exceeded 150 per cent in Canada last year, placing Canadians among the most personally indebted people in the developed world, and just short of the 160 per cent the U.S. hit before the housing market collapsed.
At the same time, net household worth is declining, and real wages aren’t keeping up with the pace of inflation, meaning Canadians in general are growing slightly poorer. Taken together with rising house prices, this paints a picture of a mortgage market that is increasingly under strain.
That fact was enough to raise alarm bells at the IMF, which warned late last year that Canada could face a correction if house prices and debt levels did not come under control. A 15-per-cent house price correction could shave 1.5 per cent off consumer spending, the IMF said.
But it may not be just the “subprime” portion of Canada’s housing market that could suffer through a correction. In a report released last week, CIBC argued that the people least likely to be able to afford new mortgages are the ones taking on new debt.
Baby boomers nearing retirement and those already in debt are taking an ever-larger share of the household debt burden, and those above the 160-per-cent debt level account for a third of all outstanding mortgage debt.
Banks continue to compete aggressively for mortgage holders. BMO earlier this month dropped its rate for a five-year fixed mortgage to 2.99 per cent, an all-time record low, spurring other financial institutions to follow suit.
For some analysts, the problems in Canada’s housing market are already too entrenched to avoid a market correction.
“The problem is sort of baked in now, so I’m not sure there’s a way to prevent a weakening of the housing market,” Capital Economics’ Madani told Bloomberg.
WHAT $350,000 WILL BUY YOU IN THESE CANADIAN MARKETS
This four-bedroom, two-bathroom custom-built bungalow in St. John's West End neighbourhood boasts hardwood floors, a covered sundeck and an oversized yard. With an asking price of $349,900 and 2,750 square feet of livable space, this spacious home costs approximately $125 per square foot.
This five-bedroom, two-and-a-half bathroom house features a double-width garage and a heated inground pool. At approximately 2,750 square feet and an asking price of $349,900, it works out to around $127 per square foot.
This spacious split-level home in southeast Winnipeg features four bedrooms and three baths, a stone fireplace and a jazuzzi in the master bedroom. It sits on a 142-foot-long, pie-shaped lot. At 2,182 square feet and a $349,900 asking price, it works out to around $160 per square foot. CORRECTION: An earlier version of this slide incorrectly listed the price-per-square foot as $600.
This five-bedroom, three-bath home features vaulted ceilings, a fireplace and a massive walk-in closet in the master bedroom. At 1,408 square feet -- this average-sized house on the prairie works out to $248 per square foot.
This two-story townhouse condo just east of downtown Montreal features three bedrooms and two baths, cherry wood floors and a terrace. At 1,400 square feet and an asking price of $349,000, this condo works out to $250 per square foot.
This cozy bungalow on the edges of the Greater Toronto Area features four bedrooms, two baths and a long, 175-foot lot. Highlights include a granite countertop and newly finished hardwood floors. At a snug 900 square feet, this house is going for $388 per square foot.
This one-bedroom, one-bath condo in Toronto's Entertainment District features a balcony with a southeast exposure. In a sure sign the condo is outfitted with just the basics, the unit's sellers boast of its "brand name appliances" and "frost free refrigerator." At 700 square feet (including the balcony), it works out to $499 per square foot.
This one-bedroom, one-bathroom corner unit in Vancouver's Kitsilano neighbourhood "shows much larger than the square footage," the realtor boasts. That's good, because at 508 square feet, this place is only slightly larger than some of the bedrooms and living rooms available in similarly-priced houses in other markets. The condo boasts "gorgeous mountain views," but it'll cost you -- $688 per square foot.
5 ECONOMIC LANDMINES THAT COULD IMPACT CANADA IN 2012
Canada's household debt burden climbed to yet another record high in the third-quarter, prompting Bank of Canada Governor Mark Carney to call it "the greatest risk to the domestic economy." At 150.8, Canada's debt-to-income ratio is now higher than in the U.S. or the U.K. Meanwhile, household net worth fell, which, as many observers have warned, has made Canadians more vulnerable to adverse economic shocks.
Though BMO's Doug Porter maintains that low interest rates and modest job growth should prevent household debt issue from becoming "a clear and present danger to the outlook in the year ahead," he predicts that the debt burden is likely to increase. Unlike in the U.S., Canada's consumer recession was "very mild," leaving scant room for growth in consumer spending, he says. "At best, we see consumer spending growing in line with income next year," he said. "We've actually pegged it a little bit below income growth next year ... at less than two per cent in 2012." (FREDERIC J. BROWN/AFP/Getty Images)
When TD cut its 2012 outlook for the Canadian economy earlier this week to 1.7 per cent, the bank cited a deepening fiscal crisis in the eurozone as one of the primary factors. More bearish than BMO, which on Thursday held its expectation for Canada's GDP growth next year at two per cent, TD is forecasting "a deterioration of financial conditions and a significant European recession in the first half of next year." "A deepening recession in the region will exert a significant drag on the global economy," the bank maintained. "Canada will be negatively impacted through weaker commodity prices, confidence and export growth. Labour markets will also soften as a result." (ERIC FEFERBERG/AFP/Getty Images)
The signs are abundant that the world's largest economy is cooling. Mounting local government debt and slowdowns in everything from industrial production to the housing market has led many to predict softer economic growth in 2012. "Real estate is a locomotive industry that leads at least 58 other industries," Cai Weimin, who runs a real estate think tank in Shanghai, told NPR. "Doomsday probably won't come true in 2012, but for the Chinese economy, 2012 will be a very tough year. (Aaron tam/AFP/Getty Images)
As Canada's rich-poor divide widens, some experts warn that the concentration of wealth at the top of the income distribution and stagnating wages for everyone else could be a drag on the economy. Though Canada's income gap is not as pronounced as in the U.S., Canadian Centre for Policy Alternatives economist Armine Yalnizyan argues that the growing divide is bad for business all the same. Mind The Gap: Our examination of Canada's growing income divide "Real growth in purchasing power has been restricted to a small fraction of Canadian consumers in what is already a small market," she maintained in an op-ed in Canadian Business magazine. "Throttling aggregate demand slows the economy for everyone." Anne Golden, president and CEO of the Conference Board of Canada, echoes this sentiment. "Growing inequality distorts consumer patterns," she told The Huffington Post in a recent interview. "Most businesses, except maybe for Porsche [dealerships], rely on rising purchasing power of the many, not the few, to deliver growth and profits." (ADRIAN DENNIS/AFP/Getty Images)