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Canada’s Strained Housing Markets. March 7, 2013. Derek Holt Vice-President, Scotiabank Economics. Outline. 1. Macro backdrop & the Bank of Canada 2. Canadian Housing: Strains Mitigating Factors Why It’s (Somewhat) Different From the United States Pockets Of Concern.

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Canada’s Strained Housing Markets

March 7, 2013

Derek Holt

Vice-President, Scotiabank Economics

  • 1. Macro backdrop & the Bank of Canada
  • 2. Canadian Housing:
      • Strains
      • Mitigating Factors
      • Why It’s (Somewhat) Different From the United States
      • Pockets Of Concern
Spare Capacity Will Prevent The BoC From Hiking Through 2013-14

Even The BoC’s Output Gap Doesn’t Go Into Excess Demand By 2014

Among The World’s Best Corporate Balance Sheets

Source: Statistics Canada, Quarterly Survey of Financial Statements, Scotia Economics

Canada Is At A Cycle Top In Housing

Source: K:\DATA\CANADA\Housing\Home Ownership.xls

Source: Statistics Canada, Census of Population, U.S. Census Bureau, Housing Vacancy Survey, U.K. Office forNational Statistics, Census of Population, Australian Bureau of Statistics, Census of Population and Housing.

Canada Is At An Exhausted Point In The Consumer Cycle

Real consumer spending indexed to 2007Q1 = 100



Euro zone



Source: OECD, Eurostat, UK National Statistics, Scotiabank Economics.

canadian renovation spending at a record high
Canadian Renovation Spending At A Record High

Canadian Renovation Spending

C$ bns, nsa, 4-quarter moving average

% of personal disposable income, nsa, 4-quarter moving average

Source: MLS, Statistics Canada, Scotiabank Economics.

Home Price Indices – Repeat Sales Metric

index:Jan 2000=100

Canada – Teranet National Bank House Price Index

US – Case-Shiller Home Price Index

Source: Teranet National Bank House Price Index, S&P/Case-Shiller Home Price Index, Scotiabank Economics.

Canadians Have Higher Debt… But Stronger Balance Sheets

Canadians’ Debt-To-Income Now Higher…

… But Less Debt Used To Buy Assets

household credit liabilities as % of disposable income

household debt as % of assets





* Includes households, non-profits and unincorporated business.Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics.

Canada’s Debt Service Burden Is At An All-Time High

Distorted by accounting change

Source: Bank of Canada, Statistics Canada, Scotia Economics.

No Leverage Apart From Household Debt? Think Again
  • Condos have driven all of the rise in housing starts for years…
  • …estimated 45-60% of Toronto of new condo sales over recent years have gone to investors not for primary occupancy….
  • …5-15% down payments at sales office openings imply +/- 10 times gearing…
  • …then flip when the project goes live
  • Leveraged equity has been behind this
Weakest Household Debt Growth Since The 1990s…

Common/raffi/derek/Household Credit Cannibalization - Back to 90's.xls

…Especially For Consumer Loans

Common/raffi/derek/Household Credit Cannibalization - Back to 90's.xls

After Ottawa Eased The Most Since 1954 NHA and 1967 Bank Act…
  • 1999: Introduction of 5% down payment insured mortgage
  • 2003: Price ceiling on insured mortgages lifted
  • 2005: Introduction of insured mortgage with 30-year amortization period
  • 2006: Introduction of insured mortgage with 35-year & 40-year amortization periods
  • 2006: Introduction of 0% down payment insured mortgage
…CDN Macroprudential Rules Clamped Down
  • After sharply easing mortgage lending standards in 2006-07, the federal government has since reversed its position
  • October 2008: Max 35 year amortization for insured mortgages; minimum 5% down for insured mortgages; consistent minimum credit score; new loan doc standards for property value and incomes
  • February 2010: Qualify at 5 yr posted rate instead of 3 yr; lower refi ceiling to 90% from 95%; min 20% down required to get mortgage insurance on non-owner occupied properties
  • January 2011: Max 30 year amortization for insured mortgages; refi ceiling for primary occupancy homes dropped to 85% from 90%; withdraw gov’t insurance on HELOCs
  • November 2011: Accounting changes to hold more on balance sheet
  • June 2012: Max 25 year amortization for insured mortgages; insurance dropped for mortgages on homes valued over $1 million (ie: now minimum 25% down); refinancing ceiling dropped to 80% from 85%; mortgage payments and total debt payments capped at 39% and 44% of income respectively.
  • 2012-13 Federal Budget: OSFI oversight of CMHC
  • Spring 2012: Insurance lifted from covered bonds, portfolio caps at the CMHC, new OSFI lending guidelines to banks
  • January 2014: Basel III
  • A key difficulty lies in evaluating the opaque forms of non-rules-based tightening being applied through moral suasion by regulators to lenders and GSEs.
Good Reasons For Rising High-Rise Housing Demand?

Housing Starts

% share of total

  • Better affordability
  • Favourable demographics
  • Lifestyle choices
  • More selection
  • Urban renewal / intensification
  • Tight rental vacancy rates
  • Investor purchases



Source: CMHC, Scotia Economics.

Canadians Have More Home Equity & More Real Estate in their Portfolio

… and More Real Estate Assets

Canadians Have More Home Equity…

Real estate as % of total household assets

Real estate equity as % of real estate assets





Includes households, non-profits and unincorporated business.Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics.

What Makes Canada’s Mortgage Market Different?
  • Explicit GSE guarantees – unlike the US GSEs
  • Strongly capitalized banks & captive dealers, far less shadow banking
  • Totally different funding model: deposit funding & large held-on-book component, versus reliance upon revolving door financing
  • Financial institutions less reliant upon short-term lines
  • No strategic defaults, outside of Alberta & Saskatchewan (and limited there)
  • Tougher bankruptcy rules
  • Less outsourcing of sales force in Canada
  • Generally more conservative products, but not entirely
  • No option ARMs in Canada, but entire book resets within 5 years
  • No mortgage interest deductibility (with exceptions)
  • Stricter underwriting criteria including independent appraisals & hair-cuts
  • Canada has already taken steps to tighten mortgage rules…
  • …and is pursuing further financial reforms (Basel III, OSFI oversight etc)
Canadians Usually Don’t Default When House Prices Correct

trough to peak in provincial mortgages in arrears, bps

Canada has witnessed some big price corrections since the late 1980s that corresponded with big shifts in the macro environment, notably in Toronto and Vancouver, and yet each time mortgage arrears barely budged.

Implication? Revenues are at greater risk than charge-offs.

Toronto’s Luxury Condos Adding To The Overhang

Opening Date:

January 2012

April 2011

Summer 2012

August 2012

  • 25 storeys
  • 101 residences

Residences at the Ritz-Carlton

Trump International Hotel & Tower

Shangri-La Toronto

Four Seasons Private Residences (East & West Towers)

  • 55 storeys
  • 253 hotel rooms
  • 103 residences
  • 53 storeys
  • 267 hotel suites
  • 159 condo units
  • 65 storeys
  • 118 residential units
  • 261 hotel rooms
  • 66 storeys
  • 202 hotel rooms
  • 287 residential units




Derek Holt, Vice-President, Scotia Economics

[email protected]

Dov Zigler, Financial Markets Economist

[email protected]

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Disclaimer & Legal Notices

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.

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