Canada Housing — False Alarm

Here I read the reports so that you don’t have to.

CMHC’s Red Alert

After warning every one two weeks ago Canadian real estate is entering “red alert” territory, CMHC released the Housing Market Assessment (HMA) as promised on October 26. I was waiting for it so I went looking for it but if CMHC was expecting a slow down or even a “wait and see” approach from developers, investors or financiers once the report is released, CMHC would have been very disappointed. No one batted an eye lid.


Let me be honest here. Even I was disappointed with the assessment. Taking example of Toronto and Canada, it is overvaluation that is pushing the real estate in “red” category. HMA defines overvaluation as “The continued rise in house prices has not been matched by growth in personal disposable income giving rise to strong evidence of overvaluation.” I am not saying CMHC is wrong to define it like that but nobody else believes that over valuation is a problem. Hence, everyone ignored it except for the press and even some of them were scratching their head at why CMHC issued report in such a way. One theory

It is that the CMHC seems to realize that, after years of being a property market booster, taking a sterner line on the future of Canadian houses will have an effect of its own, especially after its red alerts have been amplified through the media.

Like politicians, media also has its constituents: 1. its readers and 2. advertisers. Media can talk about affordability but talking about overheating? Let’s see.

PWC — Cautious Optimism

Now that we got fear mongering regulator out of the way, let’s see what others were saying this week. PWC released its Emerging Trend in Real Estate 2017 report yesterday along with the hashtag #ETRE17 on twitter which is result of a wide ranging survey conducted by them annually. If there is a red alert siren was blaring somewhere, these guys (survey respondents) are not hearing it. The first line on the landing page is

Investors, developers and property owners are cautiously optimistic about the Canadian real estate market’s outlook for the year ahead.


What red alert? The decline in optimism is so minor that one can attributed it to a rounding error.


There is only one chart (one on the left. Yellow line is 2017, red is 2013 and remaining the in between years) in the ETRE17 that may give you some pause. But the note tells me that it is not based on actual data but rather estimated based on averages. It will be taking current average home price whereas large proportion of mortgage outstanding would be at a lower price.

The following chart talks about change in sentiment with respect to investing in real estate


Again I would term any decrease for 2017 as rounding error. Probably prospective home owners are only one who might be facing a crunch but as far as investors, developers, financiers are concerned they can’t find quality assets to invest in. As can be seen from the below chart that two of the most “over valued” real estate markets Toronto and Vancouver are doing fine.


TD Economics — Soft Landing

The economists at TD worked hard to gauge the impact of new federal mortgage rules but concluded their research note on a cautious note

While each individual rule is incremental in nature, when taken together they will likely serve to cool the housing market alongside other dynamics that are also in place. However, ultimately, we believe these regulations will only reinforce the moderation in housing activity already baked into our forecast. From a national perspective, we forecast sales to ease back in line with their long-run average and prices to dip slightly next year……. There is no doubt that the new rules will create some near term volatility, but we believe these rules will anchor sales activity to its long-run average.

[I was hoping that TD Economics would give a number. Any number. While I agree it is difficult to estimate the impact of new rules but not impossible. A few phone calls and some Excel analysis, a number can be arrived at. Some organizations like First National and Genworth Canada gave good estimates which I covered here. Genworth went as far as to say that 50% to 55% of their total portfolio new insurance written would no longer be eligible for mortgage insurance under the new rules] — Apologies for the digression.

DBRS — Rising Risks

That is what I thought at first. Then I realized that red is the color of DBRS logo that is why headline was covered in red.


DBRS report is more from the bank’s perspective rather than housing. However, despite sounding the alarm, DBRS plays soothing tunes:

DBRS views the Banks’ current exposure as being manageable due to mortgage insurance, the government and regulators’ actions to constrain riskier mortgage lending, and the Banks’ capacity to absorb increased provisioning

I like this chart from DBRS report


The resulting supply deficit (with the exception of 2015) has likely been one important factor driving up prices in the GTA. Given the 6–12 month (for detached houses) and 2–3 year (for condos) timeframes between starts and completions, the lower number of starts for the period 2013–2014 (see Appendix I) implies a reduced supply of new housing coming to market over 2016–2017

This means huge supply of condos will again hit the market in 2018–2019 due to high starts in 2015 which may put downward pressure on condo prices.


One indicator of the stress on home buyers from rising house prices is the high level and continued increases in the proportion of all insured mortgages that have loan-to-income ratios (LTIs) above 450%. The proportion of these high LTIs has been rising across all metro areas in Canada, particularly in the GTA and GVA (see Exhibit 3)

It would be interesting to see how the above chart looks in 2016. If the above chart scared me about the indebtedness of Canadians, the below chart gives fright about the exposure of Canadian banks to risky real estate loans


However, trends in the Banks’ holdings of just uninsured mortgages and HELOCs in BC and ON show most banks are still increasing their holdings of these home loans that are riskier than insured mortgage loans (see Exhibit 5). Uninsured mortgages and HELOCs have lower LTVs than insured mortgages, which reduces their risk of loss, but they are still riskier loans for banks than insured mortgages. HELOCs are generally viewed as riskier than first mortgages, but similar underwriting and limits on combined LTVs restrict the risk in these lines. By their nature, there is also the risk that borrowers could use the lines and increase their debt to maintain their payments, if they are stressed by a loss of income due to unemployment or other causes.

And DBRS concludes it by saying

Currently, the Banks have capacity to absorb more elevated provisioning. At this time of low inflation, the worst case scenario for housing is increasing rates combined with rising unemployment. This scenario appears unlikely at this time.

Conclusion — Whither Red Alert?

The summary of all the reports is every thing is ok and manageable at the moment. If there is a negative economic shock, all bets are off. However, by their nature, no negative shocks are visible on the horizon.

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