Although household debt is on the rise and home prices in some markets remain out of reach for many average Canadians, a recent study from Chartered Professional Accountants of Canada (CPA Canada) finds that Canada’s housing market is different and likely more resilient than it might first appear, and warns not to compare it to the 2008-09 U.S. housing market bubble and resulting crash.
“Beyond prices and debt levels, Canada shares far fewer similarities with the U.S. than you might think,” said Francis Fong, CPA Canada’s chief economist and author of the study, The Real Story Behind Housing and Household Debt in Canada: Is There Really a Risk? “This becomes very apparent when you look at just one measure: credit quality.”
Some key factors in the U.S. housing crash were relatively lax regulation and the prevalence of sub-prime mortgages issued to homebuyers with low credit quality who were unable to keep up with payments. Credit quality is a measure of an individual’s ability to repay debt.
In contrast, Canada Mortgage and Housing Corporation (CMHC), which insures Canadian mortgages in situations where buyers cannot put down a 20 per cent down payment, says the number of borrowers with high credit quality has jumped from 66 percent in 2002 to 88 per cent in 2017. Meanwhile, the number of low credit quality buyers fell from 17 per cent to three per cent during the same period.
CPA Canada warns that despite this, Canada’s housing market isn’t immune to risks, but that any issues here will not be identical to the U.S. housing collapse.
CPA Canada also notes that there has been a steep increase in the use of non-regulated lenders in Canada, which do not provide as much protection compared to the heavily regulated banking system. However, the overall impact of any failures by non-regulated lenders would be much lighter compared to what occurred in the U.S.
When recently introduced rules that provide more protection for mortgage lenders from defaults and more stringent income-testing standards for borrowers are considered, the Canadian system seems to be ready for prospective challenges, even if the economy softens in Canada or abroad.
“The situation in Canada is likely not a bubble in imminent danger of deflation; in fact, housing prices may reflect the true value of living space in Canada and in some markets increased household debt may be the new price for real estate,” added Fong, in a press release. “Our cities frequently are listed among the best places to live and work in the world and, compared to their peer cities abroad, they are not among the most expensive. We may simply be dealing with the law of supply and demand, so affordability could continue to be a challenge for the foreseeable future.”