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Homeowners pawns in housing debate

Canadian households are on the verge of financial ruin. We’re up to our eyeballs in debt, and even our cute little houses with the white picket fences are about to crumble to dust in a U.S. style meltdown.

Then again; maybe not. A debate on the financial health of the average Canadian is raging and has rarely been so polarized. Even global analysts from outside the country have weighed in on the matter.

A Dangerous Bubble

More and more warnings on the Canadian housing market are sounding from across the border. Jeff Weniger, senior investment analyst at Chicago-based BMO Private Bank says we’re in a dangerous bubble. “If the number of cranes dotting the skyline is any guide, a visitor to Toronto could be forgiven for thinking the place looks like Shanghai” he writes.

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His report highlights Canada’s home price-to-income ratio which has grown to 9.5 in Vancouver, 5.9 in Toronto and averages 3.6 across the country. It cites another report by global consultancy firm Demographia showing the norm in the English speaking world is well under 3.

BMO Private Bank also compares Canada’s household debt-to-GDP ratio, a comparison of debt to the total value of goods produced, which shows us nearing the 97.2 per cent level in the U.S. just before its housing meltdown.

Weniger says our housing decline will be accelerated by a rise in interest rates and take a direct toll on the seven per cent of workers employed in construction, Canada’s mortgage-heavy banking system and the loonie.

As a result he’s telling to clients to avoid Canadian denominated investments and put their money in emerging markets and the U.S, which is currently recovering from its housing meltdown.

What Bubble?

Carleton University professor Ian Lee says the doom-and-gloom reports are not getting the full picture of the Canadian residential property market.

While he admits Toronto and Vancouver are due for a slight correction, properly assessing the Canadian housing market involves a great deal more than counting cranes.

He says the danger of Canada’s average household debt level of $200,000 is defused by the fact that two-thirds are invested in mortgages. Those mortgage payments eventually become home equity, which Canadians use in retirement.

An extra layer of safety is instilled in the system by requiring mortgage insurance for down payments of less than 20 per cent. Since Canadians tend to stay in their homes longer than Americans, he says the likelihood of property values even dropping by that much over the long term is remote.

He says Canadians give stability to the housing market by treating their homes as investments. Gains on principal residences are not taxed, much like a tax free savings account. Retirees can draw income from their home through a secured line of credit, a reverse mortgage or downsizing to a smaller home.

He applauds steps taken by Ottawa to cool the housing market. Finance Minister Jim Flaherty has tightened mortgage insurance rules four times since the 2008 financial crisis.

Last summer the maximum length of insured mortgages was scaled back to 25 years from 30 years. Even with shorter amortization periods he says his research shows there is no connection between mortgage length and default. His reasoning goes beyond academics to his past career as a mortgage manager in the 1970s and 1980s. At the time the mortgage delinquency rate was 0.5 per cent. After a brief rise in the 1990s that rate has returned to 0.5 per cent.

He also says one stabilizer that is difficult to measure is a unique culture trait in Canada that places a high value on debt repayment.

“There’s a joke bankers tell about Canadians” he says. “They would rob a bank to pay their mortgage.”