Why Canada Will Not Experience a U.S.-Style Housing Crash

By Brennan Valenzuela
Ratehub.ca

As one of the oldest and largest banks in Canada, CIBC maintains the fourth most mortgage dollars in its books. Recently, Fitch ratings agency found that CIBC was the most exposed Canadian bank to potential risk from a housing meltdown, due in part to the size of their mortgage books. CIBC's Deputy Chief Economist, Benjamin Tal, recently explored the possibility of a U.S.-style housing crash and found that Canada will not experience a housing crisis of the same order. Here's why.


The growth rate of debt-to-income ratio
Although the household debt-to-income ratio hit a Canadian record 163 per cent this year – causing alarmists to point out the ratio surpasses the U.S. recession level – it is still not enough to cause a housing crisis. CIBC says the most important aspect of household debt that should be taken into consideration is the speed at which it grows. A comparison of the three years leading into the U.S. crash to the past three years in Canada shows that the debt-to-income ratio in Canada has been rising at half the rate the U.S. was experiencing.


The quality of debt
The proportion of credit scores in Canada, which ranges from good to risky, has not changed dramatically over the past four years. The U.S. by comparison saw their risky credit score category surge by 10 per cent in the four years heading into the crisis. In fact, the risky category made up more than one-fifth of the entire market.

Even more astonishing, is that one-third of all new mortgages taken out in the U.S., from 2005 to 2006, were in negative equity position (meaning the mortgage was larger than the actual value of the property) - before the drop in home prices! More than half of new mortgages loaned out at that time had less than five per cent equity in their homes. Here in Canada, the negative equity position is virtually non-existent and only 15 to 20 per cent of all new mortgage have less than 15 per cent equity.

^{Source: CIBC Consumer Watch}


Our sensitivity to higher mortgage rates
The typical mortgage term in Canada is five years, which exposes us to mortgage rate hikes more so than our American friends, whose standard mortgage term is 30 years. However, two-thirds (65 per cent) of Canadians have fixed rate mortgages compared to those with variable rate mortgages (29 per cent). The latter is considered riskier, since the rate is based on lender prime rates, which are subject to market volatility. Incidentally, CIBC found the popularity of new variable rate mortgages has been decreasing rapidly in Canada over the past two years. This was a much different story in the U.S. pre-housing crash, where adjustable rate mortgages remained elevated (as high as 36.6 per cent) until the bubble burst.