Canada's housing market is showing signs of peaking, one of the country's biggest lenders said, as the banking sector expresses more caution about the outlook for real estate in the coming year.
The market should inevitably cool in 2012 as housing supply begins to outstrip demand, and consumer debt hovers at historic high levels, the head of Canadian Imperial Bank of Commerce told an investor conference on Tuesday.
CIBC chief executive officer Gerry McCaughey told analysts and investors in Toronto that the housing market is "leaning heavily into an area that might be peaking," and instead will begin to soften.
His comments came as the heads of Royal Bank of Canada and Bank of Montreal also expressed concern over cooling housing prices, particularly in the condo markets in Toronto and Vancouver, where capacity is significantly overbuilt.
Even as new data from the Canada Mortgage and Housing Corp. on Tuesday indicated the market finished the year strong, with housing starts up more than 7 per cent in December, the banks indicated the outlook is growing more tenuous.
"When you look at markets like Vancouver and Toronto, there is a level of caution from a risk perspective that is higher today than it would have been a few years ago," RBC CEO Gordon Nixon told the conference.
Bank of Montreal CEO Bill Downe agreed, but said he didn't think a hard crash in real estate prices similar to what happened in the United States will happen in Canada. But the Canadian market will likely drift downward from its high levels in recent years. "I wouldn't give up on the Canadian housing market, but … there has to be a landing." Mr. Downe said.
Analysts have worried about a housing slump in Canada. But any moderation seen in the market so far is merely a retreat from inflated levels compared with the country's 10-year average, rather than a drop below historic norms, a report by BMO said this week.
That growth has been driven in large part by low interest rates and the banks' willingness to lend. At CIBC, Mr. McCaughey said mortgage lending expanded so rapidly in recent years, that the market may now be nearing its zenith. Low rates and lending growth has helped fuel the economy, but they have also helped exhaust some demand for the years ahead, he suggested.
"We now have more than a trillion dollars of mortgage debt in this country. And it's not very long ago that it was [less than $700-billion]" Mr. McCaughey said. "I don't think that's happening again. That's what was necessary to fuel part of what got Canada through this recession in fine shape, so there's a good consequence of it. It wasn't all bad. But it's something that has pulled demand forward."
Mr. Nixon said RBC has conducted stress tests on its books for a decline in housing prices of as much as 25 per cent. Though the bank doesn't figure the situation will become that dire, it is comfortable its lending operations could withstand such a large hit if one were to occur, particularly in the Vancouver and Toronto condominium markets. The bank's exposure to the Canadian condo development market is about $2-billion, Mr. Nixon said.
"We feel very comfortable that we can manage through a significant downturn," Mr. Nixon told analysts. "But again there would be ancillary impact," he added, suggesting the bigger concern would be a downturn in the broader economy, in terms of housing demand and growth.
At BMO, Mr. Downe said his bank's exposure to the condo market is lower than RBC's, but did not give a specific figure. Though the concerns of both banks are not limited to only condominium construction in Vancouver and Toronto, that is where the market is most exposed, the CEOs said. Any problems would show up there first.
"There's no question that the warning signs around the Canadian housing market have been visible for more than a year," Mr. Downe said. "And I think that particularly with respect to two markets, Toronto and Vancouver, investor-owned condo properties have got to be a cause for concern, just because of supply and demand."
Mr. Nixon said he isn't worried of a drastic collapse in prices like the one seen in the United States in recent years.
"Notwithstanding the fact that yet there is a concern about consumer credit levels [in Canada] I think it's also very important to constantly reiterate the structural differences between markets in Canada and markets in the places like the United States," Mr. Nixon said.
"When you look at the overall Canadian bank lending levels, when you look at the presales, when you look at the customers that we're dealing with, we feel pretty comfortable that, notwithstanding there's vulnerability, we can manage through it."