Jan 19, 2011, Canadian mortgages linked to strong economy

Residential mortgage credit has expanded very rapidly in Canada during the past decade, at an average of about 10 per cent per year, raising fears about the level of risk in the mortgage market and possible consequences for the broader economy, says a new report.

The report – Revisiting the Canadian Mortgage Market-The Risk is Minimal – says the United States experience has provided a “sobering illustration of the possible repercussions of mortgage risk run amok.”

But the rapid growth in Canadian mortgage debt is related to a very strong economy.

And the report says the vast majority of borrowers holding highest risk mortgages have considerable room to absorb interest rate increases.

“The essential finding of this research report is that Canadians – lenders and borrowers – have been highly prudent in the mortgage market,” says the report by Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals.

The major risk in the mortgage market is the loss of ability to pay, particularly due to job loss and a secondary risk is unaffordable increases in payments, says the report.

But the reports says increases in payments is a “negligible risk factor at present and in the near-to-medium term future.”

The Calgary Real Estate Board’s annual forecast, released on Tuesday, said Alberta’s foreclosure rate has remained relatively low compared with the United States. But Alberta is experiencing the highest level of mortgages in arrears in many years.

Citing Canadian Bankers Association data from September, the board said 0.78 per cent of mortgages were more than three months in arrears, up from 0.75 per cent in December 2009 and nearly double the national average.

“Alberta’s volume represents nearly 4,000 homes, of which Calgary’s proportion is projected to be about 1,500,” said the board’s report.

“In Calgary, banked owned units and homes in foreclosure represent 490 of active MLS System listings, the majority of which are vacant. These foreclosed units have had some impact on home prices in Calgary. Listings and sales of bank owned properties began to increase in 2008 … Through the summer of 2010, active listings from financial institutions increased, but moderated in September 2010. This may have marked their peak, and improvements in employment in 2011 are expected to curb further growth of foreclosure volumes.”

By Mario Toneguzzi, Calgary Herald