Canada Headed for Financial Meltdown?

Source: The Canadian Press

Posted: 09/24/08 6:12PM

Filed Under: Canada

TORONTO - Contrary to the prevailing view that Canada's housing and mortgage markets are more stable than their U.S. counterparts, Merrill Lynch is warning that this country could face a meltdown that's similar to the one that has devastated the American economy. In a report issued Wednesday, Merrill Lynch Canada economists said many Canadian households are more financially overextended than their counterparts in the United States or Britain. They said it's only a matter of time before the "tipping point" is reached and the housing and credit markets crack in Canada.

The Merrill Lynch Canada report by economists David Wolf and Carolyn Kwan acknowledges that the analysis is more pessimistic than the prevailing view. Many economists have been saying that Canada's housing and banking sectors are much more stable than their American counterparts and will likely slow down but not crash. James Marple, an economist at TD Bank, said Wednesday "we don't feel there will be the kind of crash that we have seen in the United States." For instance, he said, housing affordability has not declined like it has in the United States. "We have seen a housing market that has stayed closer to what we feel are underlying demographic fundamentals," Marple said. The housing sector in Canada has not "had that kind of glut of housing supply across the country" that would lead to the massive correction experienced in the U.S., he said. But Merrill Lynch - whose U.S. parent is one of the biggest victims of a crisis in financial markets that is rooted in the American housing and mortgage meltdown - said Canadians should be wary.

Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007 - meaning they're carrying more debt than households in the United Kingdom and not far off the peak U.S. shortfall in 2005 - just before the subprime mortgage crisis erupted.

"These data imply that the Canadian household sector is now overextending itself
as much as the U.S. or U.K. ever did, challenging the consensus view that
Canadian lenders and borrowers have been far more conservative through the
cycle,"

the Merrill report says. It also says housing prices are now falling and inventories of unsold homes are rising sharply in Canada suggesting that this market turnaround will not be a transitory phenomenon. However, the prevailing view is that Canada's lenders have issued few of the type of subprime mortgages that sparked the U.S. crisis, which is continuing to ripple through the financial system. In addition, many observers argue that Canadian residential properties are, by and large, not overvalued - considering the strength of regional economies in resource-rich provinces. Said Marple, housing demand in Canada has been the strongest in places such as Alberta where there has been strong income growth and strong migration due to the oil industry and the oilsands projects.

"Those markets ... likely were a little bit overheated,"

he said. "We have started to see prices falling down ... but nowhere near the type of correction that we have observed in the United States." In fact, he said, if you take out the Alberta housing market, "home prices are still rising" across the country. "We've moved into a more balanced market," said Marple, "where we have seen in the last year new listings growth outpace home sales."

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