BOOM, BUST, BALANCE

Three significant housing reports published yesterday paint very different pictures of Canada's housing market.
The CD Howe Institute says that in spite of recent dips in Canadian house prices, we will not experience a US-style housing crash because of our stricter government policies and tighter underwriting standards.
Jim MacGee, author of the CD Howe report, says that to evaluate the likelihood of a US-style housing market crash in Canada, one first needs to understand what caused the US housing boom and bust.
Unlike in the US, the Canadian subprime market never expanded significantly into newer products, such as interest-only or negative-amortization mortgages, whose popularity grew rapidly in the US from 2003 to 2006.  Canada's subprime market accounted for roughly 5% compared with 22% in the US.
MacGee also explains in the report that looser underwriting standards  in the US increased their exposure to high-risk mortgage products such as low-documentation, interest-only and adjustable rate mortgages. This build-up was a key factor in the US housing market crash, since when house price appreciation slowed (and then reversed) many borrowers found themselves unable to meet their monthly mortgage bills.
The resulting rapid rise in foreclosures, in turn, seems to have played a role in driving the large decline in US house prices since 2006.
This difference in government policy has helped to discourage the build-up in Canada of a large number of high-risk mortgage loans. This suggests that even with modest declines in Canadian house prices, as predicted for 2011, it is very unlikely to trigger a US-style surge in foreclosures.
However, the report published by the Canadian Centre for Policy Alternatives, has a different view on what will ultimately cause the bubble to burst.  David Macdonald, the economist behind the report entitled "Canada's Housing Bubble: An Accident Waiting To Happen", says that affordability and low interest rates are the issue.
Each of Canada's previous bubbles was punctured by only a one per cent rise in interest rates over two years, Macdonald warned.  

It would take only a one per cent to 1.25 per cent mortgage rate increase by Canada's big banks to cause a housing crash similar to the one the U.S. is grappling with, he says.
"I talked about the comfort zone for houses being $150,000 to $200,000 inflation adjusted today's dollars. In income terms that is 3 to 4 times median income for households under 65. Three to four times is the comfort zone but today, the best market is at 5 times median income and worst is at a shocking 11 times in Vancouver," adds Macdonald.
In fact, all six major markets in Canada are out of the comfort zone with an average price of over $300,000.
Macdonald said there's about a six-month to one-year window of opportunity before mortgage rates rise dramatically to "let some air out of the housing market" and help prevent the possibility of future bubbles.  

Mortgage qualification changes announced in April, the same ones which CD Howe sites as one of the stricter lending rules that differs Canada from the US, didn't go far enough for Macdonald.

  He argued that the government should change the required downpayment from five per cent to ten per cent to further deter those who won't be able to afford rate increases.
And finally, CMHC published the Canada edition of their Housing Market Outlook in which the association forecasts a softer fall market with prices raising slightly in 2011.
CMHC also predicts that mortgage rates will gradually increase in the second half of 2010 and 2011.  For Q4 2010, the one-year posted mortgage rate is assumed to be in the 3.4% to 4.5% range, while three and five year posted mortgage rates are forecasted to be in the 4.0% to 6.5% range. In 2011, CMHC predicts the one year posted rate to be 4.5% - 6.0% and three and five year rates to be 5.0% - 7.0%.

Thanks Laurie Furness

Guy Buchanan, Sales Representative - RE/MAX Aboutowne Realty Corp., Brokerage