The debate rages on: Is the Canadian housing market headed for a soft landing, or is it a bubble waiting to burst with disastrous consequences for the economy? The lack of data on mortgages in Canada makes this a difficult question to answer. According to CIBC economist Benjamin Tal, having all the information could be a necessary condition to avoid a housing market collapse.
What to make of the contrasting implications of our record household debt to disposable income ratio given stable housing starts and minimal national home price appreciation?
Well, without knowing the distribution of borrowers’ debt service ratios, the distribution of mortgages by actual mortgage rate, credit score distributions, and equity positions of borrowers given their type of mortgage (fixed- or variable-rate), it’s pretty hard to get an accurate picture.
“The gap between the importance of the real-estate market to the economy and the lack of publicly available information on it is mind-boggling,” writes Tal in an April 3 piece titled “Flying Blind.”
We were reminded of the housing bubble threat again in an April 3 Maclean’s column by portfolio manager Hilliard MacBeth, who argues, among other things, that Canadians should not add to debt and rent instead of buy.
According to the latest from the Canadian Real Estate Association (CREA), Canada has a well-balanced housing market. The metrics supporting this assertion are a stable sales-to-new listings ratio that hovers in the low 50s (within the 40 to 60 well-balanced range), along with a months-of-inventory measure (6.4 months) that points to balance between supply and demand. (The number of months of inventory represents the number of months it would take to completely liquidate current inventories at the current rate of sales activity.)
Recent evolution in housing starts, home sales, and home prices don’t suggest cause for concern, and the latest data releases this week shouldn’t change that.
But it’s not national housing statistics that are the concern—it’s what could happen to over-leveraged homeowners if a shock were to hit the Canadian economy.
“The real test of Canadian housing will take place when interest rates start rising,” writes Tal.
While the Canadian economy has recently shown some strength (jobs growth in March, pickup in exports, inflation set to rise in the near future, and higher expectations for second quarter GDP), rate cuts look less likely. Short-term interest rates are still expected to remain stable until the middle of next year.
But what’s key for mortgage rates is the five-year Canadian bond yield, which has tended to be pushed and pulled by gyrations of the U.S. five-year bond yield. The average five-year fixed-rate mortgage offered by the big six banks has inched higher over the past couple of months (to roughly 4.10 percent), although Bank of Montreal recently dropped its rate to 2.99 percent.
The critical data on borrowers’ mortgages, their equity levels, and the ability to perform sensitivity analysis (for example, if rates rise one percent, what happens to a borrower’s ability to pay his or her variable-rate mortgage), resides with the originators of the mortgages—the big banks (for the most part).
The crux of issue, explains Tal, is that the big banks maintain proprietary information for their competitive purposes and therefore this valuable information is not in the public domain.
“The key issue here is that the partial but publicly available information is what really controls the agenda,” writes Tal.
The risk from the “information asymmetry,” as Tal puts it, can be alleviated if the policymakers—Canada Mortgage and Housing Corp. (CMHC), Office of the Superintendent of Financial Institutions (OSFI), Department of Finance, and Bank of Canada—work together to make data available and improve communication.
Until that takes place, which will no doubt take time, the impacts of a shock to the housing market will be hard to assess.