Canada’s Housing, Mortgage and Credit Markets

Canada’s Housing, Mortgage and Credit Markets

Department of FinanceOctober 2008

Department of FinanceOctober 2008

2

Strong housing price growth in Canada followed a prolonged period of weakness leading to much lower levels than in the U.S. by the mid 2000s.

Source: Canadian Real Estate Association; S&P, Fiserv, and MacroMarkets LLC.

Existing Home PricesExisting Home Prices

Index = 100 in 1989Q1

U.S. S&P/Case-Shiller home price index

Canada

80

100

120

140

160

180

200

220

240

260

280

89Q1 91Q1 93Q1 95Q1 97Q1 99Q1 01Q1 03Q1 05Q1 07Q1

3

IMF: Divergence from price growth suggested by fundamentals (1997-2007)

IMF: Divergence from price growth suggested by fundamentals (1997-2007)

Source: IMF Fall 2008 World Economic Outlook. The IMF definition of fundamental factors includes: disposable income growth per capita, short- and long-term interest rates, credit growth, equity price growth and growth in the working population. Price growth that is not explained by these factors can be interpreted as a measure of over valuation and, therefore, the susceptibility of a correction in house prices.

According to the IMF, house price growth in Canada has been fully explained by fundamental factors.

Per cent

-10

0

10

20

30

40

Au

stria

Ge

rma

ny

Fin

lan

d

Ko

rea

Ca

na

da

Po

rtug

al

U.S

.

Ne

w

Ze

ala

nd

Italy

Gre

ec

e

Ne

the

rlan

ds

De

nm

ark

Ja

pa

n

Be

lgiu

m

Sp

ain

Sw

ed

en

Fra

nc

e

No

rwa

y

Au

stra

lia

U.K

.

Irela

nd

4

Mortgage debt relative to the value of housing has declined in Canada since 2001 - unlike the U.S.

Ratio of Mortgages to the Value of HousingRatio of Mortgages to the Value of Housing

Ratio

Canada

U.S.2008Q2: 0.55

2008Q2: 0.31

Source: Statistics Canada; U.S. Federal Reserve

0.25

0.3

0.35

0.4

0.45

0.5

0.55

0.6

2001Q1 2003Q1 2005Q1 2007Q1

5

The share of mortgages in arrears in Canada remains low, suggesting that Canadian households are better able to service their mortgages.

Percent of Mortgages in 90-day ArrearsPercent of Mortgages in 90-day Arrears

Canada

U.S.

Per cent

Source: Canadian Bankers’ Association; Bloomberg

08Q2: 4.5%

08Q2: 0.3%

0

1

2

3

4

5

2002Q1 2004Q1 2006Q1 2008Q1

Average Tier 1 Capital Ratios of Major Banks

AVG CDN Banks

AVG U.S. Banks

AVG U.K. Banks

AVG Euro Banks

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

Tie

r 1

Ca

pit

al

Ra

tio

7

Canadian Interest Rate Spreads

Source: Bloomberg

Banks' Cost of Funds vs. Government of Canada Banks' Cost of Funds vs. Government of Canada

0

25

50

75

100

125

150

175

200

225

250

275

300

325

350

Oct-00 May-01 Dec-01 Jul-02 Mar-03 Oct-03 May-04 Dec-04 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Aug-08

basis points

Short term (3-month Bankers' Acceptance vs. T-Bill)

Medium term (Merrill Lynch Canadian Financial Index vs. GOC 5-year)