DBRS Study: Renovations Underway in the Canadian Housing and Residential Mortgage Markets

In spite of some volatility in the months after September 2008, Canadian housing and residential mortgage markets went through the recent global financial crisis and the ensuing recession mostly unscathed, says DBRS in “Renovations Underway: Housing Markets, Residential Mortgages and Household Leverage in Canada,” a study issued today. With the help of government-assisted funding, the financial system remained sound and liquid, lending activity remained cautious but healthy and outstanding household credit continued to grow.

However, DBRS notes in this study that there are potential concerns in the areas of increasing household financial leverage as well as elevated property values and declining affordability in selected markets. “The renovations mentioned in the title refer to the recent changes to mortgage insurance and lending standards, the shift in market dynamics over time and the anticipated increases in interest rates and taxes,” says Jerry Marriott, Managing Director, Canadian Structured Finance. “All of which are expected to have a cooling effect on the Canadian residential property and mortgage markets.”

The study also notes that mortgage lending grew steadily over the past decade, reaching $958.8 billion at the end of 2009, more than double the $414.1 billion ten years ago. Including home equity lines of credit, the outstanding mortgage-related credit was greater than $1 trillion.

Mortgage funding also underwent noticeable changes. For example, from 2008 to 2009, government-guaranteed National Housing Act (NHA) mortgage-backed securities (NHA-MBS) increased by $135 billion, while historically dominating chartered banks reported a meager $5 billion increase in residential mortgages held on balance sheet. “Government-supported facilities became a critical funding source for mortgage lenders,” says Kevin Chiang, Senior Vice President, Canadian Structured Finance, “injecting ample liquidity into the Canadian financial system during the recent financial crisis. Covered bonds also emerged as another source of funding for large Canadian banks.” By the end of April 2010, $15.8 billion of Canadian covered bonds had been issued into European, Canadian and U.S. markets.

“Between 2000 and 2009, residential properties in Canada appreciated in the range of 93.9% to 112%, based on several measures. Over the same period, Canadian households increased their debt loads by 122.6%, while total personal disposable income only grew 61.3%,” continues Mr. Chiang. Consequently, the ratio of total household debt-to-total personal disposable income reached 133.2% at the end of 2009 compared with 96.5% a decade ago. “This is the highest level in Canadian history,” adds Mr. Chiang.

DBRS also takes a look at housing price trends in six cities across Canada. “Despite slumps during the recent financial crisis, most housing prices have surpassed pre-financial crisis levels,” says Mr. Marriott. Average housing price-to-income ratios in Canada are now estimated to be more than 30% above historical average. DBRS expects a reversion to the norm will occur, but the timing and speed of that reversion will dictate the magnitude of the impact on the residential property and mortgage markets.

If you are interested in receiving a copy of “Renovations Underway: Housing Markets, Residential Mortgages and Household Leverage in Canada,” please e-mail info@dbrs.com.

MEDIA CONTACT
Caroline Creighton
Senior Vice President –
Communications
Tel. +1 416 597 7317
ccreighton@dbrs.com