November 8, 2010
Banks aren’t usually known for having catchy titles, but BMO’s most recent report entitled “Canadian housing: Pricey, not dicey” is an exception.
The thought behind the phrase is this: while Canadian housing is somewhat overvalued, that doesn’t mean that we’re going to crash– at all. Markets go through periods of overinflation and then proceed to endure a pricing correction. S’all in the game. All in the game. (The Wire? Anyone?).
Anyway, their conclusion is in good company. Mark Carney announced recently that he thinks a US-style housing crash is unlikely to be replicated in Canada.
According to the Globe and Mail:
“A key overriding difference is the quality of loan origination in the past decade, as well as other institutional factors such as mortgage insurance and recourse against defaulters,” [BMO] wrote in the report…
Basically, Canadians had to have an income to receive mortgage approval. Seems pretty basic, but think about all the talk about NINJA loans a couple of years ago (mortgage applicants with no income and no job still receiving approval). We also don’t have the same sub-prime lending environment that existed in the US.
And while the recent Economist article stated that Canadian homes were inflated by 24%, it’s important to note the statistics they based this inflation on. They compared house prices to the cost of renting, which is always skewed because rents are not allowed to increase with market prices due to rent control policies in each province.
A more stable reference point is comparing housing prices with income. According to this measure, homes are overvalued by about 11% (a much less troubling number than 24%). This is largely due to an increase in Canadian incomes and a slight decline in housing prices already this year.
Whatever the cause though, Canadian homeowners can rest assured that we’re going to be alllllrrright. Isn’t that a relief? Sweet.