Canada’s runaway housing market is cause for alarm, but analysts at Goldman Sachs say it has one crucial ingredient the U.S. lacked in 2007.
Analysts have rightly noted strong parallels between Canada’s current housing market and the one that precipitated the U.S. subprime mortgage crisis back in 2007. But there’s one saving grace that may help our northern neighbor avoid a similar fate.
Canada’s mortgage standards have grown stricter as the market runs hotter, which is the opposite of what happened when U.S. housing prices approached their peak in 2007. Canadian policymakers have been actively tightening lending guidelines long before the central bank raised interest rates this summer. This partly explains the sharp rise in so-called shadow lenders in the aftermath of the financial crisis.
In 2013, the Bank of Canada (BOC) said private sources of unregulated capital accounted for roughly 5% of total origination, a sign that borrowers were attempting to circumvent the harsher guidelines. This figure has likely increased as mortgage standards have become even stricter.
Over the years, regulators have reduced the maximum loan-to-value ratios and amortization terms, as well as taken decisive steps to curb foreign speculation in Toronto and Vancouver. In 2016, the federal government introduced sweeping changes that left many prospective buyers unable to enter the market. This included a mandatory stress test for high-ratio mortgages.
The test gauges whether a buyer can still afford to make payments if mortgage rates rose to the BOC’s fixed rate, which at the time was more than two percentage points higher than the industry average.
Under the rules, buyers who put down a deposit of less than 20% are also required to purchase government-backed mortgage insurance. All these costs add up to the point where affordability is diminished or market entry is no longer feasible.
But it doesn’t stop there.
Earlier this year, the government of Ontario slapped a 15% tax on foreign buyers in the Toronto region. The new tax is part of a 16-point plan to slow a market that has become dangerously overheated. British Columbia initiated a similar tax last year for the city of Vancouver, although the results have been mixed.
Canada’s housing market has grown at a staggering pace since the global recession, with prices accelerating 76% over the past eight-and-a-half years. The average price of a Canadian home is up more than 14% over the past 12 months, with regions like Toronto and Hamilton tacking on more than 25% year-over-year.
Despite runaway price growth, Canadian mortgage delinquencies remain far lower than the U.S. average. Canada’s 90+ day delinquency rates have run at a fraction of the U.S. average going back 30 years.
Goldman Sachs concludes its analysis by saying that a housing crash similar to 2007 would pose smaller systemic risks on Canada thanks to lower mortgage defaults and strong bank capitalization. Of course, this analysis didn’t mention the staggeringly high debt loads are carrying. Canadians are the most indebted people in the G7, and show no signs of being debt averse.
With interest rates rising 50 basis points in the last two months, Canadian borrowers are being put to the test. It remains to be seen whether the economy recent strength will be sustainable enough to offset higher interest rates.
 Bloomberg News (January 22, 2015). “Shadow lenders file risk in Canada’s hot housing market.” Financial Post.
 Meredith MacLeod (October 5, 2017). “Mortgage rules: what do the changes mean?” CTV News.
 Jonathan Garber (July 19, 2017). “GOLDMAN SACHS: There’s one big difference between Canada’s Crazy housing market and the US in 2007.” Business Insider.