Subprime Mortgage Crisis Not Likely to Spread to Canada

Written by Posted On Wednesday, 04 April 2007 17:00

The meltdown of the subprime mortgage market in the U.S. continues to make headlines, causing a housing recession in that country. In Canada, the housing market is still booming, and the mortgage industry says it is healthy and strong.

The reason, apparently, is that Canadians are "boring" when it comes to mortgage borrowing.

"Our view is that the price appreciation in the U.S. housing market over the last two years was, in many ways, artificial -- boosted by aggressive lending and irresponsible borrowing," says Benjamin Tal, an economist with CIBC World Markets, in a recent Consumer Watch report. "The Canadian market by comparison has been much more boring during the housing market boom of the last 10 years. Granted, some of those exotic mortgages are now being offered in Canada, but their share in the market is too small to have any material impact. And while we expect housing market activity in Canada to level off in the coming year or two, all the indicators suggest that it will be a relatively soft landing, with limited damage to the quality of the mortgage business as a whole."

Subprime mortgage products make it easier for people with credit issues to qualify for a mortgage, but they come with added risks for lenders.

The Canadian Association of Accredited Mortgage Professionals (CAAMP ) says the subprime market makes up five per cent or less of all outstanding mortgages in Canada, while in the U.S., the market is closer to 20 per cent. The overall arrears rate on mortgages in Canada is at or near record lows of less than 0.5 per cent, says CAAMP.

Canadians are a more conservative lot than Americans when it comes to mortgages. CAAMP says Canadian underwriting practices are "more prudent, as we have not been focused on a market share war for the subprime business." And it says that Canada doesn't use option adjustable rate mortgages for sub prime borrowers, as they do in the U.S. In Canada, "lenders qualify mortgages with consideration for payment variation, which has not been the practice in the U.S."

While new mortgage lenders and products have been introduced in Canada over the last few years, the Canadian mortgage market has other differences from that of the U.S., says CAAMP. It says the "vast majority" of mortgages are amortized over 25 years or less, with nearly two-thirds of mortgages set at fixed rates, with the five-year period being the most common.

"The Canadian mortgage market also differs from the U.S. in other ways -- we have not seen the aggressive lending practices common south of the border," says Paul Grewal, chairman of CAAMP. Jim Murphy, CAAMP's president and CEO, says, "It is important to note the continued strength and stability of the mortgage and housing markets in Canada."

Adrienne Warren, senior economist with Scotiabank, says that relative to the U.S., speculative investing in real estate in Canada "has been less active, overbuilding less prevalent and high-risk lending less widespread. A consistently strong domestic job market and historically low mortgage rates are sufficient to maintain at least some forward momentum" in the Canadian housing market, she says.

Phil Soper, president and CEO of Royal LePage Real Estate Services, says that another big factor that encourages speculative real estate investment in the United States is that mortgage interest is tax deductible. He also says that U.S. housing affordability is at its worst level in two decades, while affordability in Canada "remains much better than the 1989 spike." He adds, "U.S. household debt is approximately 25 per cent higher per capita than in Canada."

Another CIBC World Markets report says that rising global energy and base metal prices will outweigh the impact of the "woes in the U.S. housing and subprime mortgage market and drive the Toronto Stock Exchange to outperform the S&P 500 this year." The report's author, Jeff Rubin, says, "While we expect to see further distress in both the U.S. housing market and the subprime mortgage market, there is little if any evidence of broad contagion effects in financial markets."

Tal says in his report that even though there's a rapidly rising default rate in the subprime mortgage category in the U.S., "We have not seen a significant increase in default rates in U.S. prime mortgages but even at their current low level, they are well above the rates seen in Canada -- which are currently at a record low."

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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