Mortgages Could the Canadian Market Follow the Same Course as the U.S. Market? Provided by Gareth Watson, CFA, ScotiaMcLeod Many of you may have heard that Merrill Lynch issued a report in which they believe the Canadian Housing Market could follow the same course as the U.S. Housing Market. I contacted Derek Holt of Scotia Economics to get his point of view on this subject and he provided me with the following response: Thomas O’Brien “Bottom line is that I agree there are downsides to Canadian housing via lower Mortgage Development construction and resale volumes, and lower prices. But mortgage market Manager comparisons are way off base. For now, some key points: Ottawa District Canadian subprime is small (5-6% of outstanding mortgages) whereas U.S. share was about 3 times that. As a share of originations, 20-25% of 613-866-2624 new mortgages in the U.S. were subprime over the 2004-06 period. Canada's subprime is more like U.S. near-prime, or Alt-A. More email@example.com conservative. Debt-to-income comparisons are meaningless since it compares debt financed over decades to a single year's income. Debt-to-assets is a much better leverage measure and Canada is far below the U.S. Our mortgage equity withdrawal market isn’t like the U.S. We've seen secured home equity lines of credit (Helocs) grow in Canada as a way of withdrawing equity, but nothing like the U.S. withdrawals picture. Funding model is different: less securitization in Canada, more retail funding. Plus, not funded by short-term lines from other financial institutions as in the U.S. MBSs were not placed in off-B/S SIV and CDO structures as in US. So not the same heavily leveraged investor risks. This is perhaps the most important point. The nature of the products has been very different. Long-amortization in Canada is nothing like Ninja mortgages. Relatively speaking, mortgage innovation was needed in Canada, but has been relatively more conservative. ARMs resets in the U.S. usually occur suddenly. Variable rate mortgages in Canada get constantly repriced so people aren't caught off-guard years later. Plus some variable rate products adjust the principal, not the payment in Canada. Investor mortgages in Canada are about 2-3% of all outstanding mortgages, versus 10-11% in US and UK. Another point is that the reason why loan growth as a share of income soared in Canada earlier this decade is that our housing downturn was much more severe in the early 1990s, and we took longer to see a material housing recovery than they took in the U.S. So pent-up demand was being unleashed in Canada. If, instead, we consider the whole cycle, then the variable that matters is the end-point on leverage, which is far lower in Canada today than in the U.S. There are many points to make, but the bottom line makes for very different mortgage market comparisons.” ® Registered trademark of The Bank of Nova Scotia.