The Canadian housing market is showing several serious signs of stress, but Bank of America Merrill Lynch says there's no reason to believe values are set for a sharp dive.
"Valuation metrics are clearly stretched, but the usual symptoms of a tipping point are simply not there," according to a report authored by economists Sheryl King and Ryan Bohren.
"Speculation is low, price expectations are cautious, home building is not excessive and most importantly the economy continues to expand steadily."
The resale housing market has been strong through the first half of the year.
The Canadian Real Estate Association will release its national resale numbers for February Tuesday, and is expected to show stronger than usual activity as buyers continued to take advantage of record low interest rates.
(There are also some who believe buyers bought in February to secure 35-year amortizations on their mortgages, which are no longer available as of mid-March.)
The report said the structure of the Canadian mortgage market makes a U.S.-style crash unlikely, and listed four key reasons the market is unlikely to tank:
- Mortgage insurance is explicitly guaranteed in Canada, limiting bank exposure to higher risk borrowers.
- Recourse laws mean fewer borrowers walk away from mortgages.
- Thirty per cent of mortgage funding is government backed, providing a stable and liquid source of financing.
- Canadians are "relatively conservative, with leverage ratios only just matching the levels of a significantly deleveraged U.S. household."
The report also outlined reasons Canadians should be concerned about rising prices (don't worry, a list of reasons why not to worry follows):
- Canadian home valuations look stretched, with "the average estimated asking rental yield at all time lows. Housing affordability looks relatively good, but will likely to decline as mortgage rates are set to rise and lending rules are tightening."
- Canadian home ownership rates are near record highs of close to 70 per cent, and real estate assets are near a record 38 per cent of household assets.
- Canadian mortgage-debt-to-disposable-income reached a record high of 93 per cent (similar to the U.S.).
As promised there are three reasons to believe the market won't crash:
Canadian home sales as a percentage of housing stock remains below the 10-year average, "suggesting the turnover is not excessively speculative."
Housing starts in 2009 and 2010 have averaged around 160,000, "just below the natural formation rate of around 170,000."
"Most importantly - economic conditions in Canada continue to improve. The employment levels are above pre-recession levels, wages are growing and financial conditions remain very easy."