Risks are Contained Within the Canadian Mortgage Market

By CAAMP Chief Economist, Will Dunning

Recent media reports have expressed some concerns about potential risks for the Canadian housing and mortgage markets. One of the concerns being expressed is that Canadian consumers have been "over-extending" themselves through mortgage borrowing. And, it has recently been suggested that the Canadian housing and mortgage markets might fall into a downward spiral like the one currently underway in the United States.

Most Canadian economists, including CAAMP's Chief Economist, point to very substantial differences between the Canadian and US situations, which mean that the risks in Canada are considerably lower than they have been in the US.

The Canadian Economy is Much Stronger

During this decade the Canadian economy has been much stronger than the US economy. Figure 1 shows the percentages of adults that are employed (the "employment-to-population ratio"). The US economy peaked at the start of the decade. While it recovered somewhat during 2005 and 2006, the ratio has remained well below the prior peak. By contrast, the Canadian economy has shown increasing strength in this decade, and the employment-to-population ratio has set new record highs every year from 2003 to 2008. Moreover, to the extent that the US economy did improve at mid-decade, most of the growth was from the housing market - increased construction plus home equity take-out. There was a self-reinforcing bubble in the housing market. In Canada, on the other hand, economic growth has been diversified and much more durable. The Canadian economy has done a very good job of generating highly-qualified home buyers; in the US, slower job creation has meant that there have been fewer good mortgage candidates. Credit quality has remained very strong in Canada but slipped badly in the US.