Monday, August 25, 2014

The Truth About Canadian Housing Market

A dearth of concrete data on the financial position of Canadian homeowners has left those who study the mortgage market operating in a near void. | lofilolo via Getty Images

What We Don't Know About Canada's Housing Market Could Sink Us. If Canadian home prices suddenly plummeted by 20 per cent, what percentage of homeowners would be at risk of foreclosure?

We don’t know.

If interest rates rose by one per cent, how many Canadians would be too stretched to make their monthly mortgage payments?

We don’t know.

Is there anything analysts, policy makers, lenders and borrowers could do differently to protect Canadians and the economy against a crash, or at least prevent exacerbating one?

We don’t know.

A dearth of concrete data on the financial position of Canadian homeowners has left those who study the mortgage market operating in a near void.

Some industry observers have warned for years that the market is headed for a big drop, that the levels of borrowing and sky- high pricing are unsustainable. But so far they have been wrong. Prices continue to rise while incomes stagnate. With no end in sight, conflicting views of the health of the market abound.

In Canada’s post-recession era of ultra-low interest rates, some buyers have been taking on much larger mortgages than they would be able to afford if rates were even a little higher.

When rates reset, overextended buyers could sink into insolvency, but just how many would be affected, and the extent to which this could impact the market, are unknowns.

In the vacuum of official government data on everything from the average down payment to the average monthly mortgage payment to the number of condos owned by foreigners, the country’s top real estate researchers — and even the federal government — must draw conclusions from partial information, surveys and anecdotal evidence.

"We simply don't know what kind of risks lurk in the Canadian housing market," says Robin Wiebe, senior economist at the Conference Board of Canada.

The experts whom Huffington Post Canada spoke with had a laundry list of data they’d like to access — more than 20 points in total.

"It sure would be nice to know whether or not we're on this trajectory to get ourselves, this society of borrowers, into serious trouble," adds Queen’s University real estate expert John Andrew.

Andrew wants access to information that would be useful for prediction, including data revealing the average amount of a mortgage loan compared with household income, which could shed light on how much of our budgets those mortgages are eating up.

"It would be extremely easy to do that, and I think that would be extremely valuable information."
At the top of Wiebe’s wish list: more information on people at a high risk of default — those who have high ratio mortgages (less than 20 per cent equity in their homes) and long amortizations (smaller monthly payments over a longer period).

Government disclosure of data such as the amount of equity in homes would reveal the strength of homeowners’ financial positions, Wiebe says, and “go a long way towards discovering if we are actually in a bubble or not.”

Some of the information the experts want to access is readily available in peer countries such as Australia and the United States.

South of the border, banks are required to report much more information, including debt service ratios (the amount of income going toward a home) and loan-to-value ratios (the amount owed on a home compared to the amount invested). Though that information didn’t prevent the 2008 U.S. housing crash, it provided comprehensive insight into what, exactly, was happening — and a potentially valuable lesson for Canada.

'The Lack Of Publicly Available Information ... Is Mind-Boggling'
Experts from bank economists to academics to urban planners are growing increasingly frustrated with the lack of numbers available to crunch, and by the nagging fear that there’s something more we could do to prevent catastrophe if we knew more.

Those frustrations were summed up in a scathing indictment of Canadian real estate data by CIBC economist Benjamin Tal earlier this year. His report was dropped from headlines as quickly as it made them, but has become something of a Jerry Maguire-like manifesto for those in the industry.
“The gap between the importance of the real-estate market to the economy and the lack of publicly available information on it is mind-boggling,” he wrote.

Tal’s report pointed out that banks, including his own employer, collect important information such as the credit scores of high risk borrowers and how much equity their clients have in their homes compared to how much they owe. But they refuse to share it, even with their own economists.
“The key issue here is that the partial but publicly available information is what really controls the agenda,” he wrote.

Government bodies including the Bank of Canada and the Office of the Superintendent of Financial Institutions confirmed that they are not in the business of collecting and disclosing the important banking data that researchers want.

Even the Canadian Mortgage and Housing Corporation, the government arm responsible for insuring high-risk borrowers, keeps a lid on most of its collected mortgage market information, while its annual review of the housing market relies partly on a survey conducted by the mortgage industry itself.


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