The document summarizes a study by Jim MacGee that argues Canada is not at risk of a US-style housing bust due to differences in mortgage underwriting standards between the two countries. Specifically, riskier "exotic" mortgages became common in the US starting in 2003, leading to higher defaults during the economic downturn, whereas in Canada defaults only increased in line with the economy and remained lower. Additionally, home price growth in the Greater Toronto Area has been supported by sustained affordability as measured by the percentage of household income needed for housing costs.

1. Date: September 9, 2010
Canada Not in Danger of US-Style Housing Bust
ARTICLE REVIEW: Jim MacGee, August 31, 2010, “Not Here? Housing
Market Policy and the Risk of a Housing Bust”, CD Howe Institute.
Link to Briefing: http://www.cdhowe.org/pdf/ebrief_105.pdf
The CD Howe Institute recently released a study written by Professor Jim
MacGee (University of Western Ontario), which poses the question of whether
or not the Canadian housing market could experience a US-style bust,
including a steep drop-off in the average selling price.
MacGee argues that mortgage underwriting standards evolved much
differently in the US and Canada leading up to the economic downturn in both
countries. As early as 2003, US sub-prime borrowers (i.e. those with troubled
credit histories) were gaining access to more exotic mortgage products that
included the option for interest only payments and negative amortization.
Riskier borrowers and borrowing terms prompted mortgage defaults and
declining average selling prices in advance of the economic downturn in the
US. In Canada, in contrast, defaults rose only in conjunction with the
economic downturn and remained much lower than in the US (see Chart 1).
The lower default rate in Canada, bolstered by the comparatively low
percentage of riskier “exotic” mortgage types in this country, helped support
home prices and also supports the view that Canada’s Federal Government-
guaranteed mortgage insurance program is not exposed to the same risk as
government sponsored and private insurance programs in the US.
Home price growth in the GTA has been supported by a sustained period of
affordability, as evidenced by TREB’s Affordability Indicator (see Chart 2).
Even with the strong price increases experienced over the better part of the
last year, the average combined mortgage, property tax and utility payment as
a percentage of average gross household income remains in line with the
accepted mortgage lending standard, which requires a gross debt service ratio
(GDS) of 32 per cent or less.
0%
2%
4%
6%
8%
10%
12%
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
Source: US Federal Reserve Board; Canadian Bankers Association
Chart 1: Residential MortgageDelinquency Rates
Canada and United States
United States
Canada
25%
30%
35%
40%
45%
50%
55%
Source: Toronto Real Estate Board Data and Calculation; Statistics Canada
*Assumptions: The average YTD selling price as of August 2010; 20 per cent down
payment; the average five year fixed rate mortgage rate; 25 year amortization;
estimated average propertytaxes, utility costs and household income.
Chart 2: TREB Affordability Indicator
Share of Average Household Income Used for Mortgage Principal and Interest,
PropertyTaxes and Utilities on the Averaged Priced GTA Resale Home*
Written By:
Jason Mercer
TREB Senior Manager of Market Analysis.
jmercer@trebnet.com