Major US-based credit-rating agency Fitch Ratings has some good news — and some bad news — for Canada’s housing market.
First, the good: “Key structural features will safeguard Canada from repeating the US housing crisis,” says Fitch in a news release.
And then the bad: “Unsustainable home prices and record high household leverage render the Toronto and Vancouver housing markets increasingly vulnerable to a steep price correct.”
Increasingly, comparisons are being made between the current conditions observed in the Canadian housing market and those that existed prior to the subprime mortgage crisis collapsed US real estate.
Especially as Home Capital Group has become the subject of much attention.
The spotlight has been on the alternative or subprime mortgage lender ever since the Ontario Securities Commission, a provincial regulatory agency, said it didn’t disclose knowledge of broker fraud when it first discovered it.
“However, Canada is unlikely to mirror the declines and fallout experienced during the US housing crisis due to major differences in the housing and mortgage finance systems,” says Fitch Director Kate Lin in a statement.
“Canadian banks are subject to rigorous oversight and regulations requiring prudent mortgage lending and underwriting standards,” Lin continues.
The Fitch director adds that Canadian credit quality is strong, whereas the same could not be said about the US mortgage market before the crash.
In its latest Financial System Review, the Bank of Canada recently noted an improvement in the quality of high-ratio mortgages in Canada.
These mortgages in which the loan-to-income ratio for the borrower surpasses 450 per cent only accounted for a 10 per cent share of all new mortgages in this year’s first quarter.
That’s down from the same period last year, when the share of these mortgages was well above 15 per cent.
Lin notes that before the US crash, nonprime loans accounted for about 50 per cent of the total volume of originations.
“The Canadian government has also been proactive in managing the risk of the nation’s housing market by taking unprecedented steps to tighten credit and limit speculation,” Lin adds.
But Hilliard MacBeth, a financial analyst, recently suggested that increasing mortgage quality might not be all it seems.
“Higher prices and new rules are driving people to find more innovative and risky ways of coming up with the higher downpayments for a home purchases, increasing their risk,” he writes in his latest Hilliard’s Weekend Notebook report.
It could be that some buyers are turning to alternative lenders to get money for larger downpayments, since buyers who put forward at least 35 per cent of the value of a home sometimes aren’t subject to income verification. But the interest rates on these loans are much higher than the prime rate, and if home-price growth even slows, problems for borrowers can emerge quickly.
“There obviously are lots of ads all over the newspapers for people that are willing to lend money at obviously very high interest rates,” MacBeth tells BuzzBuzzNews in a followup interview.