Canadian housing crisis warning

Canada, along with Australia, ranks as one of the two last major bubble markets to remain relatively immune to the types of house price falls we have seen in the UK, Ireland, the U.S. and Spain. Yes, there has been some damage in Alberta, where prices had been rising too rapidly. But the rest of the country has stayed on a pretty even keel.

According to a report by Merrill Lynch, this is about to change.

Merrill Lynch is warning that Canada could be headed for a housing and mortgage meltdown similar to the one that has devastated the United States economy.

A report issued Wednesday by Merrill Lynch Canada economists says many Canadian households are more financially overextended than their counterparts in the United States or Britain.

They say it’s only a matter of time before the “tipping point” is reached and the housing and credit markets crack in Canada.

The Merrill Lynch Canada report by economists David Wolf and Carolyn Kwan acknowledges that the analysis is more pessimistic than the prevailing view.

Many economists have been saying that Canada’s housing and banking sectors are much more stable than their American counterparts and will likely slow down but not crash.

But Merrill Lynch – whose U.S. parent is one of the biggest victims of a crisis in financial markets that is rooted in the American housing and mortgage meltdown – says Canadians should be wary.

Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007 – meaning they’re carrying more debt than households in the United Kingdom and not far off the peak U.S. shortfall in 2005 – just before the subprime mortgage crisis erupted.

“These data imply that the Canadian household sector is now overextending itself as much as the U.S. or U.K. ever did, challenging the consensus view that Canadian lenders and borrowers have been far more conservative through the cycle,” the Merrill report says.

It also says housing prices are now falling and inventories of unsold homes are rising sharply in Canada suggesting that this market turnaround will not be a transitory phenomenon.

However, the prevailing view is that Canada’s lenders have issued few of the type of subprime mortgages that sparked the U.S. crisis, which is continuing to ripple through the financial system.

In addition, many observers argue that Canadian residential properties are, by and large, not overvalued – considering the strength of regional economies in resource-rich provinces.

For what it’s worth, it is plainly evident that there has been overbuilding in Canada’s boom province of Alberta. But, more than that, the condo building on Toronto, Montreal and Vancouver is clearly evident to anyone who has been to Canada’s major cities these past few years. As far back as 2005, the economist showed that Canadian property prices were rising at a fairly rapid clip. It is only a matter of time before the global slowdown, hits Canada’s residential property market. The same is true for Australia.

The question is not whether the slowdown will hit house prices in Canada, it is how hard.

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Source
Canadian housing crisis warning – Toronto Star