The influential Organisation for Economic Cooperation and Development has said that Canadian housing “looks” overpriced both in terms of price-to-income and price-to-rent ratios.
“Canadian house prices, or at least some regional or local housing markets, notably those of Toronto and Vancouver may still reflect excess demand conditions,” says the Paris based OECD in their annual review of the Canadian economy.
According to data, the average price of a Canadian home is 5 times the average Canadian’s salary (net). This ratio is 35% higher than the long term average.
But the OECD was more concerned that Canadian’s may be overstretching themselves in the low-interest-rate environment. According to the report by 2012 some 7.5% of Canadians will be vulnerable to interest rate rises, unless household borrowing slows.
The report says: “High household indebtedness also implies a growing vulnerability to any future adverse shocks. Household credit growth needs to slow down!”
It’s a funny old tale; the Canadian housing market, which never boomed during the global housing boom, and then boomed during the global housing bust. The OECD explained their beliefs on why this happened.
“For one thing, Canadians entered the cycle with less debt than their U.S. counterparts. Secondly, they had access to a banking sector still willing to extend credit at favourable rates. And lastly, subprime mortgages never made up more than 5 per cent of new issues, compared with 33 per cent in the United States at the peak.”
Despite these realities the Canadian government acted quickly in introducing stimulatory measures to the housing market, which turned out to be far more than was needed (for the reasons given above). Low interest rates and other measures including a first time buyer tax credit caused house sales to soar and prices to grow massively, including a 24% increase in prices in 2009.
Fears quickly emerged that the market may be overheating, and that Canadian’s may be borrowing more than they would be able to afford when rates started to rise again. The government started to take measures to cool the market this year.
Sales saw a huge drop when the tax credit ended, and it emerged that the tax credit had caused people to bring their purchases forward leaving a lull in sales for months after it ended. And the government has also tightened the criteria for government insured mortgages twice. But the OECD believes they may need to do more.
OECD suggestions included: larger down payments on all federally insured mortgages and forcing banks to disclose how “sensitive” their mortgage revenues are to rate hikes.
“Lending standards and the framework for mortgage insurance are the right tools to contain this cycle,” says the OECD.
The Canadian Association of Accredited Mortgage Professionals, which represents brokers across the country, disagrees sternly with the OECD:
“We believe new mortgage insurance rules from Ottawa would be a solution looking for a problem,” says Jim Murphy, CEO and president of CAAMP. “The real estate is already cooling with sales down and prices that are stable.”
Murphy says the government has already tweaked mortgage regulations twice and there is “No need for a third time.”