2013 – The Canadian housing market & U.S. housing market… two worlds!

The Canadian housing market will not experience the same streak of bad luck as the U.S. housing market did … why?

Statistics Canada recently changed its calculation and assessment of key economic data method to adapt it to international accounting standards. The debt ratio of the average income of Canadian families increased from 121% to 163%.

According to Dave Larock, this illusion of a debt (out of control) versus the income of Canadian families gives the impression of being technically superior to that of American households at the height of the housing bubble which remains merely an illusion.

The fact that the standardized calculation method of this ratio is based on after-tax income, has to be taken into account since this point precisely distorts the comparison because Canadians’ personal taxes cover health care costs, which is not the case for Americans. To put things in perspective, the average American spends between 10 and 20% of its after-tax income to cover costs related to health.

Although many are predicting the crash of the Canadian real estate market for several years now, economists predict the opposite today based on strong statistics.

Although the debt level is too high, the Canadian federal government’s actions to control the level of borrowing, changing policies and regulations on mortgages and CMHC OSFI worked. The debt ratio is not likely to explode in the short and medium term.

A report, by economists at BMO Financial Group, highlights the shortcomings related to the fact of using after-tax income to compare debt levels among Canadians and Americans. They say it is more fair to compare apples to apples using a gearing ratio based on gross income. Using this new method, Sal Guatieri, himself an economist of BMO Financial Group, recently said that the debt ratio based on gross income of Canadians (121%) was still well below current levels (146%) and the peak (166%) attained by the Americans. The media tends to convey biased and sensationalist information.

David Rosenberg, a well-known Canadian economist, recently wrote that the ratio of the start of construction, in civil society, “is not that far from the average of the past 10 years, while in the United States, it ranked at beyond 25 percent of the long-term average at the height of 2006-2007 “. In other words, Canada has not experienced this type of speculative investment/loan thrust that the United States has known at the last stretch of the real estate bubble.

Benjamin Tal, economist with CIBC, recently pointed out that the current growth of the overall debt of Canadian households turns out to be the slowest of the last 10 years, while levels of consumer debt falls for the first time in 20 years. This indicates a trend in the right direction.

In another report, Benjamin Tal said that the collapse of U.S. house prices was much greater in the cities where the levels of mortgage credit risks were above average, where prices have been adjusted to 40%. This is more than double the average decline experienced in U.S. cities where levels of mortgage credit risks were below average.

“By eliminating credit risks in the U.S. mortgage market, the landing would have been much more smoother, rather than experiencing the biggest debacle they lived during the Great Depression.” In comparison, the credit risks in Canada only reach 7% of the total mortgage debt, while at the height of the crisis, just before the collapse, the credit risks verged upon 25% in the United States.

While the very low interest rates contribute to the increase of household debt ratio to record levels, we are not on the brink of a collapse, as many suggest. Perhaps this alarmist statement will slow down the fervour of some speculators.


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