Snippet from Canadian Economic Outlook

Here is a snippet from the Canadian Economic Outlook report prepared by Wellsfargo International.


"Unlike in the United States, where there is a tax deduction for mortgage interest, Canadians do not have a similar incentive to carry mortgage debt. We have long maintained that the best argument against a housing bubble is the notion that a significant deterioration in mortgage credit has not yet manifested itself in Canada. Mortgage delinquencies typically lead foreclosures, and we have yet to see any deterioration in mortgages that are in arrears. In fact, according to the Canadian Bankers Association, the percentage of mortgages in arrears, or at least 90 days past due, is just 0.32 percent, down from 0.39 percent at this time last year. Canadians are carrying more debt, but with the overnight lending rate in Canada still at a historically low level, the cost of financing that debt is not yet proving too much of a burden for Canadian homeowners.
The Canadian housing market appears to be somewhat overvalued at present, and the downside risk for home values seems to outweigh the upside potential for continued home price appreciation. However, with low delinquency rates, a relatively stable employment outlook and affordable financing, the Canadian housing market does not appear to be poised for a major selloff like the U.S. housing market experienced between 2007 and 2009.
Some pockets, however, are looking “frothier” than others. Speculative investment by foreign investors has limited affordability in markets like Vancouver, and some stress fractures are beginning to emerge. Vancouver is one of the markets tracked by the TNBC HPI; this measure shows prices off almost 3 percent since June.
The pace of residential construction activity does not seem to have adjusted to a slower pace of hiring and economic growth (Figure 12). That said, the monthly change in the number of Canadian building permits has been volatile this year, with permits up six months and down four months. While home values may hold up, we would not be surprised to see residential construction activity dial back a bit to be more in synch with a slower pace of GDP growth."