Housing bubble fears overblown, board says

Despite high debt levels, Canadians are coping, says Conference Board

TORONTO — A new Conference Board of Canada study says there’s no housing bubble about to burst and maintains Canadians are having no trouble handling their debt even as it sits close to record levels.

The Ottawa-based group pointed to mortgage arrears, which are going down in just about every market across the country, making a U.S.style meltdown unlikely. The percentage of mortgages in arrears is well under one per cent in Canada.

“A relatively low proportion of arrears is likely to persist, since national employment is growing, albeit slowly, and interest rates are not forecast to spike,” the Conference Board says in its report, titled Bubble Fears Overblown.

The report says the market will cool, but it will happen gently. The report cites mortgage costs, not just home prices, as the principal determining factor for the market for future buyers.

“We believe that the more prudent mortgage underwriting in Canada than in the United States, headlined by the very small number of subprime loans here, has prevented the stockpiling of high-risk mortgages by lenders,” states the report.

Others argue the Canadian market bears striking similarity to the U.S. market.

“It’s a lagging indicator,” David Madani, an economist with Capital Economics, said about mortgage arrears. He said the arrears come when the market starts to fail. “The first sign of trouble in the U.S. was declining home sales, then a year later prices fell and then people started missing payments”

Much has been made of Canada’s tighter loan standards with none of the NINJA loans — no income, no job, no appraisal — that were found in the United States.

Still, Canadians are holding record amounts of debt. Statistics Canada said debt to disposal income went down slightly during the fourth quarter of 2013. But, at 164 per cent, it remains very close to an all-time high.

“It’s an extraordinary level next to household income and interest rates don’t have to spike,” Madani said. “Even if they go up moderately, it can have big impact on affordability.”

With little demand from new buyers, prices would ultimately sink and leave people vulnerable as they try to renew mortgages.

The Conference Board notes many U.S. states have nonrecourse home loans, meaning banks cannot go after other assets from consumers who walk away from homes. That protection doesn’t exist in most Canadian markets.