CIBC downplays likelihood of U.S.-style housing crash

CIBC World Markets economist Benjamin Tal says he continues to believe that a U.S.-style real estate meltdown isn't in the cards for Canada.
CIBC's economist Benjamin Tal expects a slow, gradual pullback in housing prices. (Darren Calabrese/Canadian Press)

The news out of Canada's real estate market isn't good, but the country will avoid a U.S.-style real estate meltdown, CIBC said Tuesday.

Economist Benjamin Tal said in a report that even recently released data about high levels of Canadian consumer debt isn't proof that there will be a sudden, big drop in home prices.

"To be sure, house prices in Canada will probably fall in the coming year or two, but any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today's Canadian market," he wrote.

Tal noted that Canada's debt-to-income ratio has just broken the U.S. record set in 2006, but said other countries have had even higher levels without a crash.

Statistics Canada, in revising how it estimates household credit market debt, earlier this month reported record household debt of 163 per cent of disposable income in the second quarter.

However, Tal said the U.S. market bubble saw U.S. homeowners with little or no equity value in their homes making them vulnerable when prices fell.

As well, many buyers in the U.S. benefited from low introductory teaser rates on their mortgages only to be caught short when rates increased and they were faced with increased monthly payments.

Housing market cooling

"The introduction of the teaser rate, a low introductory rate for a period of two or three years that would adjust upward at the end of the initial period, worked to effectively neutralize U.S. monetary policy," Tal wrote.

"The practical implication of that was that when the teaser period expired, millions of Americans felt the full impact of two years' worth of monetary tightening virtually overnight."

Home sales in Canada have been falling amid uncertainty about the economy and Ottawa's tightened mortgage lending rules.

According to the Canadian Real Estate Association, September home sales fell 15.1 per cent from a year ago, while the national average price was up 1.1 per cent to $355,777 in September from a year earlier.

Regional differences

The association said that excluding Vancouver, the country's most expensive market, the average price was up 3.4 per cent from a year ago.

Tal said home prices in large cities like Vancouver and Toronto are overshooting their fundamentals and will likely slip as sales fall.

"But the Canada of today is very different than a pre-recession U.S., namely as far as borrower profiles are concerned," he wrote.

"Therefore, when it comes to jitters regarding a U.S.-type meltdown here at home, the only thing we have to fear is fear itself."