Is The Canadian Housing Market Sustainable?

Is the Canadian economy a success story that we should follow, or are the Canadians traveling down the same path as the American economy?  This is an important question for the citizens here in the U.S.  We are watching as Canada announces better economic numbers and predicting increasing home sales.  According to Canada Mortgage and Housing Corporation (CMHC), housing starts will increase during 2010 and 2011.  Total housing starts in British Columbia have increased over last years totals, which was 16,077 total home starts.  This year those at CMHC predict those numbers will be between the ranges of 20,000 to 24,500 total home starts.

Those at CMHC believe that an improving economy and better job market numbers together with low mortgage interest rates will encourage home sales during 2010.  Most of this increase will occur in the first quarter while resale conditions will improve by the end of the year, according to the CMHC report.  According to the latest release from the Labour Force Survey of Canada, “Employment increased by 43,000 in January, all in part time, pushing the unemployment rate down 0.1 percentage points to 8.3%. January marks the fourth employment gain in six months”.

This all sounds like a growing sustainable economy that exist in a world of failing economies.  Is it too good to be true?  David Dodge, former head of the Bank of Canada has warned that housing prices have reached a point where they are “almost unsustainable”, saying, “One would have to say that the relation of house prices to Canadians’ income is right at the high end of what one would think would likely be sustainable over time”.

Mr. Dodge points out that the remedy for this may not be higher interest rates but instead he suggest the CMHC should scrutinize more closely the kind of mortgage that it insures.  If this sounds familiar, it is.  Here in the United States, mortgage insurers backed mortgages that were ultimately unaffordable for the consumer.  This created an environment that encouraged bank fraud, decreased consumer confidence and ultimately the housing crisis we are experiencing today.  To encourage home ownership in Canada, the CMHC provides insurance for higher-risk home buyers such as those who are unable to make a 20% down payment, enabling people who would not otherwise be able to get a mortgage to enter the market.

This is the same path mortgage insurers followed here in the U.S. with obviously disastrous results.  As reported by RealtyTrac in January, foreclosure filings jumped 21% in 2009 to a record 2.82 million.  James Saccacio, chief executive officer of RealtyTrac, says, “in the long term, a massive supply of delinquent loans continues to loom over the housing market, and many of those delinquencies will end up in the foreclosure process in 2010 and beyond, as lenders gradually work their way through the backlog”.

This is a simple example of supply and demand.  The Canadian market is increasing their home starts and allowing consumers into the market that can not afford the mortgage rate increase that is predicted to happen by the end of this year. This is where the main concern for the housing market of Canada takes on a dangerous appearance.  When the predicted rise in interest rates occurs Canadians could find themselves struggling to make payments.  Economist predict that the Canadian economy could reverse at the same time the interest rates increase, leaving the Canadian economy experiencing the same economic down turn as the United States.

Moody’s Economy.com reported last month that expanding Canadian consumer debt levels could leave Canada in a worse position than the United States in the next few years if the current trend continues.

According to Peter Routledge Senior V.P. at Moody’s Economy.com, “We believe the housing market is the principal driver of this expansion, adding, “We have the uneasy sense that we have seen this movie before…. As witnessed in the United States, this movie does not end well”.

Related posts:

1. California Housing Woes To Continue
2. More Mortgage Woes Ahead
3. Pending Home Sales Drop, Market Looks Bleak
4. Report: HAMP Program Only Making A Dent In Foreclosure Crisis
5. ‘Seasonality Disorder’ In The Housing Market?

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