Canada faces mortgage data gap
Lack of information ‘unhealthy’ for market: economists
TORONTO/OTTAWA — Economists love data — the more data the better, in fact.
More data on Canada’s mortgage market, for example, wouldn’t have prevented a U.S.-style housing crash, but it certainly would have helped many avoid some major pitfalls.
CIBC World Markets deputy chief economist Benjamin Tal can rattle off a string of missing data points:
“What was the dollar value of new mortgages originated in Canada in the last quarter? What is the credit score distribution of mortgage credit in Canada? What is the share of non-conforming loans in the Canadian landscape? What is the delinquency rate of those non-conforming loans?” he asked.
“What is the trend in refinancing and pre-payments? What is the net equity position of new and existing mortgages? What is the flow of rental activity in the country? What is the share of foreign investors in the condominium market? What is the average down payment?”
Tal, in a report issued Thursday, said none of these questions can be effectively answered in Canada.
“We simply don’t know,” he wrote. “Having all that information is not a sufficient condition for preventing a collapse, but it could be a necessary condition.”
There is general agreement the housing market is now overshooting, he said, but the real test for consumers will come when interest rates begin to rise.
The Bank of Canada is unlikely to let that happen until late 2015, at the earliest. For now, its trendsetting overnight borrowing rate for lending between commercial banks sits at a meagre one per cent — where it has been since September 2010. But what happens when that rate starts to rise and bond prices go up and mortgages get more expensive to service?
And that’s just scratching the surface.
“Yes, there is a lack of information,” said David Madani, at Capital Economics.
“From an economist’s point of view, it’s frustrating when you don’t have all this information that you might typically like to see in any other country,” he said. “More information is always better. It’s important normally, and it’s very important now, obviously, because of the booming housing sector.”
“How can you determine the level of rate sensitivity if you do not have information on the distribution of mortgages by actual mortgage rates, the level of down payment and the distribution of borrowers by their debt service ratio,” Tal asked.
Banks have access to much of this information, more than the average observer, and those with a bearish opinion on the market are making that call perhaps because they don’t have the same data.
Tal said the “short Canada” position is gaining traction among foreign f und managers because it is also based on similar partial information.
“This situation is unhealthy. Due to competitive reasons, lenders cannot reveal all the information they sit on, while other players are forced to use their limited information to make decisions,” Tal added.
The key to closing this information gap, he said, is for Canada Mortgage and Housing Corp. to provide more timely information to the market.
“Canada’s credit bureaus must find a way to incorporate crucial mortgage information into their reporting,” Tal said.
“The Superintendent of Financial Institutions through co-ordination with the country’s largest financial institutions can provide more information regarding credit and default trajectories — ditto for the Canadian Bankers Association,” he said.
“The time to act is now.”