Tighter lending conditions around Canada's small but expanding subprime mortgage market could splash some cold water on Canada's housing sector in the months ahead.
Some lenders in Canada's alternative mortgage market, such as Xceed Mortgage Corp. and Money Connect Home Lending, have already jacked up mortgage rates or withdrawn products in the face of rising costs.
Many of the mortgages they had offered were to segments of the population, such as the self-employed and immigrants, that have been key drivers lately in the real estate market.
"It will affect not all consumers, but a niche market - however, that niche market is one with very active house buyers," said Alex Haditaghi, chief executive officer of MortgageBrokers.com, a publicly traded mortgage company.
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Mortgage lending has become much more accessible in recent years, with many new companies offering zero-per-cent-down products and loans to people who don't qualify with the banks.
"That's going to change," Mr. Haditaghi said.
"It's going to take some people out of the market."
He expects housing starts will fall next year as higher borrowing costs also crimp growth at construction companies.
Most economists figure the market is ripe for a slowdown anyway. Canada Mortgage and Housing Corp., for example, expects housing starts will slip 3 per cent this year and about 6 per cent next year.
Still, that would mean there has been seven years in a row of starts above 200,000, the longest stretch since the early 1970s.
Some indication of a cooling came yesterday, when a Canadian Real Estate Association report showed home sales in August slid 5.3 per cent, after hitting record levels in recent months.
One reason Canada's mortgage market is more solid than that in the United States is the presence of the big banks. Canada's large banks provide at least two-thirds of the country's mortgages, and they're not experiencing the liquidity problems of the smaller players.
Bob Dugan, chief economist at Canada's national housing agency, says he hasn't changed his outlook for housing starts because of the market turmoil. But he does see the credit squeeze, which began in the U.S. and has rippled throughout the world, as a potential risk.
"If banks start holding back credit because they get nervous and ... credit-worthy borrowers can't access loans to make purchases, that could slow the economy," Mr. Dugan said.
If banks tighten their criteria on how people qualify for loans, that could also mean real estate transactions wouldn't be able to close, he said.
"That's what we keep in our mind as a risk. I haven't seen any evidence of that ... but if it were to happen it would drastically change the outlook for next year for housing."
Meantime, several subprime lenders are battening the hatches. Xceed raised its mortgage rates by 100 basis points in the past three weeks and Money Connect has also raised its mortgage rates. Money Connect CEO Maurice Forget said they've also withdrawn one type of product from the market aimed at self-employed people.
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