Mortgage Rates, DEBT DOESN'T POSE BIG RISK: CIBC

| Friday, 18 December 2009

Following a week of more housing bubble speculation, CIBC released a report <http://research.cibcwm.com/economic_public/download/sdec09.pdf> stating Canada is not at risk of a "U.S.-style housing and mortgage blow-up", adding the Bank of Canada should not move prematurely to raise interest rates.

"Historically, it's clear that mortgage arrears rates are highly correlated with the unemployment rates, with little or no correlation with changes in interest rates," wrote CIBC chief economist Benjamin Tal.

Tal listed a number of other "buffers" protecting Canada from a U.S.-style housing and mortgage crisis, including the fact that many households with a debt-to-service (DSR) ratio greater than the standard 40 per cent have already accumulated a significant amount of equity in their homes. The report said out of the five million Canadian households with mortgages, only an estimated 350,000 have a mortgage with a LTV greater than 80 per cent and a DSR greater than 40 per cent.

The report also noted that most at-risk and lower-income borrowers have already locked into fixed-rate mortgages. This differs from the U.S., where a large number of low-income households opted for variable-rate mortgages.

"There is nothing in Canada akin to the huge excesses in lending that led up to the housing and mortgage crisis experienced in the U.S. in the past few years," Tal wrote. "Existing debt burdens appear to be manageable for the vast majority of Canadians ... the magnitude of the problem is not big enough to justify a premature tightening move by the Bank of Canada."