Photo: Forsaken Fotos/Flickr
Parallels are being drawn between the pre-bust US housing market and Canada’s current boom, but this time the outcome won't be the same, right?
National Bank suggests there is indeed a key difference between the two situations.
“We take solace from the fact that lending standards for first-time homeowners in Canada have remained strict in recent years,” writes National Bank Chief Economist Stefane Marion in a note.
In 2006 — before the housing market crashed stateside — more than a quarter of first-time US homebuyers had low credit scores.
National Bank considers borrowers with a FICO score under 620 and a Beacon score of less than 660 to have low credit ratings.
In Canada, these higher-risk borrowers represent a 4-per-cent share of first-time homebuyers, a “multi-year” low notes Marion.
“That is a far cry from the peak of 28 per cent observed in the US at the height of its housing bubble,” the economist states.
Concerns about Canada’s record level of household debt have intensified recently.
“Underwriting standards for mortgage debt in Canada has become an issue for many investors following the troubles of an alternative mortgage lender at a time when home price inflation in Ontario is ahead of fundamentals,” Marion explains.
Last month, the Ontario Securities Commission, the provincial agency that regulates the lending industry, said Home Capital had knowledge of broker fraud earlier than it had let on.
The development compromised investor confidence in the subprime lender and shares tumbled.
A recent poll conducted for Bloomberg News suggests it is also negatively impacting Canadians’ sentiments towards their country’s housing market — but not National Bank’s, apparently.
“For perspective, [Home Capital Group] has a sub-$20 billion mortgage book, which translates to minnow status relative to the $1.1 trillion of residential real estate credit on Big-Six balance sheets,” a National Bank analyst tells the Financial Post.