CMHC Probes House Price “Premium” in Canada


Houses in Canada are a fair bit more expensive than their equivalents in the U.S., and that’s got the government agency that insures roughly half of all the mortgages in the country a little worried.

“This Canadian ‘premium’ could be a cause for concern, because it may indicate that house prices in Canada are overvalued,” Canada Mortgage and Housing Corp. said in its annual Canadian Housing Observer, published Thursday.

The government-owned agency’s report says it’s analyzing those differences, in order to understand whether the reasons for them are structural, temporary or reflective of “relative overvaluation in Canada.”

Prices in the two countries entered the 2000s at roughly the same level, CMHC said. In the U.S., they went on a dramatic roller-coaster ride, more than doubling by their peak in 2006 and then losing about 32% by mid 2009. Prices in Canada went up 58% by April, 2006,  then continued higher to reach a peak in August, 2008 before declining about 9% and then appreciating again, CMHC says.

The net result was Canadian prices that were substantially above their equivalents in the U.S. — about 20% higher when adjusted for exchange rates and other factors, it says.

The gap that’s opened in the post-recession years has some market watchers worried about the risk of a sharp, destabilizing correction like that seen in the U.S.

But overall, the CMHC’s annual report depicts a housing market that’s likely to remain stable, at last in the near term.

It says Canadians’ ability to service their total debt and mortgage debt has improved; in 2013, the average mortgage debt-service ratio stood at 3.66%, a slight decline compared to 3.70% in 2012, and lower than the historical average of 4.1%

“Historically low mortgage rates have been a large factor in the lower mortgage [debt-service ratios],” the report says.

That has also translated into low default rates. The CMHC report says the percentage of residential mortgages three months or more in arrears continues to be relatively low, quoting figures from the Canadian Bankers Association that indicate a default rate of 0.31% in 2013 and in the first quarter of this year.

The proliferation of high-rise condo buildings in Toronto and other large markets has been a focal point for those concerned about a sharp correction, with concern about the effects of possible oversupply in the market.

The CMHC report indicates some of that new condo construction is being absorbed by the rental market. It said that in most large urban centers, the secondary rental condominium market is an “important complement” to purpose-built rental housing, and that’s reflected in the generally low and stable vacancy rates for rental condominiums in those markets.

CMHC’s research also suggests that immigration to Canada is one factor underpinning the unexpected growth in the country’s housing market. It said immigrant households accounted for 29% of the increase in home ownership between 2001 and 2011.

The number of newcomers arriving in Canada in 2012 and 2013 hit the 260,000 level, or the most in four decades, it said. “Successive generations of immigrants will make important contributions to housing demand, especially in the larger cities that attract disproportionate numbers of new Canadians,” CMHC said.

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