Canadian homebuilders deny market headed for meltdown

No parallels with U.S.
Eric Beauchesne, Canwest News Service

OTTAWA - The Canadian housing market is cooling but is not facing a U.S. style meltdown, builders here say.

"A few commentators have drawn a parallel between the Canadian housing
situation and the extreme difficulties in the housing market in the United States," the Canadian Homebuilders say in a report Monday that dismisses such comparisons.

"There is absolutely no merit in drawing such a parallel," it said in a report that contends the pace of housing construction in Canada is merely returning to a level that is consistent with underlying housing requirements following the boom of recent years.

"The housing situation in Canada is totally different from that of the U.S.," it said. "There will be some price moderation in some markets, but there is nothing to suggest that housing markets in Canada are vulnerable to the oversupplies and plunging prices that characterize many markets in the U.S.

"We did not experience the same housing boom conditions that occurred in the U.S., and there is no reason to expect that we are in for the serious pain they are currently suffering," it said.

The moderation of house prices will improve affordability and create opportunities for first-time home buyers, it said. Meanwhile, existing homeowners have little to fear.

"For those selling a home and buying another, the moderation of housing prices should be relative - there should be no significant gain or loss from the easing of house prices," it said.

"For those who have owned a home for some period, their equity will be substantial, given the rising prices of the past few years," it said. "For those who purchased their home recently, there should be few worries about a modest temporary reduction in value."

To support its argument that the Canadian housing market is not going the way of the U.S. market, it cited a variety of differences:

* Unlike in the U.S., underwriting standards for qualifying mortgage borrowers in Canada have been maintained at prudent levels resulting in mortgage borrowers here being much more creditworthy;

* Canadian mortgage lenders never offered low initial 'teaser' rate mortgages that led to most of the difficulties for mortgage borrowers in the U.S.;

* Most mortgages in Canada are held by their original lender, not packaged and sold to third parties as is typical in the U.S., and consequently, Canadian mortgage lenders have a vested interest in ensuring that their mortgage borrowers are creditworthy and not likely to default;

* Only 0.3% of Canadian mortgages are in arrears versus 4.5% in the U.S. and what even before the start of the U.S. housing meltdown two years ago was 2%;

* Canadians tend to pay down their mortgage faster than in the U.S. where mortgage interest is deductible from taxes, which encourages U.S. homeowners to take equity out of their homes to finance other spending, a difference that is reflected in the fact that in Canada mortgage debt accounts for just over 30% of the value of homes, compared with 55% in the U.S.

In Canada, home prices are down 9.8% from a year earlier, compared with an 18% drop in the U.S. from what were already deeply depressed prices a year ago, the latest real estate industry figures show.

Most analysts here agree that Canada should avoid a U.S. style housing market meltdown.

Michael Gregory, senior economist with BMO Capital Markets, said recently that "we won't even come close" to what is happening in the U.S. thanks to stronger employment and income growth here as well as banking system that "continues to make mortgages" available to Canadian consumers.

But he cautioned that if unemployment rises in Canada, there will be a larger fallout for the domestic housing market.

"Anyway you slice it, if you don't have a job, you can't get a mortgage and you can't buy a house," Mr. Gregory said.