Crash still unlikely despite slowing credit growth

by Ephraim Vecina on 07 Dec 2018

While recent Bank of Canada numbers indicated that the national mortgage market is continuously slowing down (with a 3.4% year-over-year increase in October), a CPA Canada analysis argued that robust fundamentals are counteracting the possible risks of a U.S.-style meltdown.

The CPA noted that the sheer volume of subprime mortgages issued to borrowers who were ultimately unable to repay is one of the major (if not the leading) factors that triggered the U.S. collapse.

This differs markedly from the situation north of the border, where the proportion of high-credit-quality borrowers shot up from 66% in 2002 to 88% in 2017, according to the CMHC. During the same time frame, the number of those with low credit quality declined from 17% to just 3%.

“Beyond prices and debt levels, Canada shares far fewer similarities with the U.S. than you might think. This becomes very apparent when you look at just one measure: credit quality,” CPA Canada chief economist Francis Fong said.

Read more: B-20 now doing more harm than good – builders

“The situation in Canada is likely not a bubble in imminent danger of deflation; in fact, housing prices may reflect the true value of living space in Canada and in some markets increased household debt may be the new price for real estate,” Fong added.

October’s credit growth pace is moving closer towards the historically lowest levels of below 3.2%, which were last seen on April and May 2001. The BoC numbers are also displaying a trend towards long-term slowness, with the 3-month annualized pace of growth in October (at just 1.9%) being more than 40% lower than the annual growth.


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