If you follow the financial media regularly, you’ve probably seen a chart similar to the one below. It keeps reappearing as people continue to compare Canada’s housing market to that of the United States in 2007. While it’s near impossible that the euphoria in Canada’s housing market continues forever, the implications are unknown. Some are calling for a soft landing while others who would describe it as a Canadian housing bubble envision an epic collapse. As the end game of this market is uncertain, it is rather bold and naive to draw conclusions for an entire economy from one chart. The chart below frames a narrative that the Canadian housing bubble is even worse than America’s. There are however other pieces of data we can look at to compare the two markets besides just prices.
Lending Standards
In a report from Goldman Sachs, they noted a major difference in 2007 United States versus 2017 Canada is mortgage lending standards. During 2005-2007, lending standards in the US were loosening despite housing prices nearing a peak. Goldman noted:
“In 2006, over 40% of US mortgages were funded via the non-agency RMBS market, where no-doc and low-doc lending and usage of “exotic” loan products such as negatively amortizing adjustable rate mortgages were most common. By comparison, Canadian banking regulators have generally tightened lending standards since the financial crisis, including reducing maximum loan-to-value ratios and amortization terms, and, more recently, Vancouver and Toronto have introduced foreign buyer taxes to dampen house price growth.”
Canadian housing bubble – Delinquencies
Going back all the way to 1987, delinquency rates in Canada have remained significantly lower than the US. Tougher lending standards as noted above, coupled with more conservative underwriting, and lender-friendly mortgage foreclosure laws in Canada, allows the housing market to pose less influence on the overall economy. Goldman went on to add:
“The lower baseline mortgage default rates in Canada, combined with stronger bank capitalization, suggest that a house price decline in Canada of the magnitude experienced in the US during 2007-2011 would likely pose smaller systemic risks than were realized in the US during the financial crisis period.”
Debt
Many critics of the housing market have been noting the surging debt in Canada. While household debt to disposable income has been rising, it has been rising at a much slower pace since 2010 than during the prior decade. Apart from general debt, the mortgage to debt service ratio was historically elevated in the US by 2007. However, the same metric in Canada has remained at historically normal levels.
Goldman concluded:
“Our bust model indicates a 30% probability of a real house price decline of 5% or greater over the next two years…At the same time, we see significant differences between the US housing market in 2007 and the Canadian market in 2017, and for this reason we think it may be early to look for a downturn in Canadian house prices of close to the magnitude seen in the US before the financial crisis.”
