Cd howe can-us_housing_market_commentary

Toronto Real Estate News and update from TREB

1/1 Documents & Tips - Sharing is our passion

Share This Page

  1. Vahab Jalali
    Toronto Real Estate News and update from TREB
    Transcript Header:
    Cd howe can-us_housing_market_commentary
    Transcript Body:
    • 1. Date: September 9, 2010 Canada Not in Danger of US-Style Housing Bust ARTICLE REVIEW: Jim MacGee, August 31, 2010, “Not Here? Housing Market Policy and the Risk of a Housing Bust”, CD Howe Institute. Link to Briefing: http://www.cdhowe.org/pdf/ebrief_105.pdf The CD Howe Institute recently released a study written by Professor Jim MacGee (University of Western Ontario), which poses the question of whether or not the Canadian housing market could experience a US-style bust, including a steep drop-off in the average selling price. MacGee argues that mortgage underwriting standards evolved much differently in the US and Canada leading up to the economic downturn in both countries. As early as 2003, US sub-prime borrowers (i.e. those with troubled credit histories) were gaining access to more exotic mortgage products that included the option for interest only payments and negative amortization. Riskier borrowers and borrowing terms prompted mortgage defaults and declining average selling prices in advance of the economic downturn in the US. In Canada, in contrast, defaults rose only in conjunction with the economic downturn and remained much lower than in the US (see Chart 1). The lower default rate in Canada, bolstered by the comparatively low percentage of riskier “exotic” mortgage types in this country, helped support home prices and also supports the view that Canada’s Federal Government- guaranteed mortgage insurance program is not exposed to the same risk as government sponsored and private insurance programs in the US. Home price growth in the GTA has been supported by a sustained period of affordability, as evidenced by TREB’s Affordability Indicator (see Chart 2). Even with the strong price increases experienced over the better part of the last year, the average combined mortgage, property tax and utility payment as a percentage of average gross household income remains in line with the accepted mortgage lending standard, which requires a gross debt service ratio (GDS) of 32 per cent or less. 0% 2% 4% 6% 8% 10% 12% 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 Source: US Federal Reserve Board; Canadian Bankers Association Chart 1: Residential MortgageDelinquency Rates Canada and United States United States Canada 25% 30% 35% 40% 45% 50% 55% Source: Toronto Real Estate Board Data and Calculation; Statistics Canada *Assumptions: The average YTD selling price as of August 2010; 20 per cent down payment; the average five year fixed rate mortgage rate; 25 year amortization; estimated average propertytaxes, utility costs and household income. Chart 2: TREB Affordability Indicator Share of Average Household Income Used for Mortgage Principal and Interest, PropertyTaxes and Utilities on the Averaged Priced GTA Resale Home* Written By: Jason Mercer TREB Senior Manager of Market Analysis. jmercer@trebnet.com
    View More