In the wake of the US housing and financial crashes there were plenty of articles like this one extolling the virtues of the “sound” Canadian banking and mortgage business.
“In general, Canada’s banking system proved more prudent, more resilient, and much less prone to excesses,” wrote AEI’s Mark Perry early last year. “Canada didn’t have nearly the real estate bubble and subsequent corrective crash in home prices as the United States:”
Perry goes on to list the reasons Canadian banking is sound with no housing bubble: Full recourse mortgages, short-term fixed rates on mortgages, mortgage insurance is more common, mortgage interest isn’t tax deductible, higher prepayment penalties, fewer banks that have more diversified loan portfolios, and fewer mortgages originated by brokers with,
Banks in Canada keep[ing] and servic[ing] 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk.
Now in the wake of the Canucks loss, the Financial Post is concerned for the Vancouver (and Toronto) housing markets. Jacqueline Thorpe writes,
Mark Carney came as close as any central banker ever could on Wednesday to saying some parts of the Canadian housing market are in a bubble. He also basically said there’s not much the Bank of Canada can do to stop the frenzy.
Vancouver home prices are now 11 times higher than the average household income, considerably higher than the 5 times figure reached at the height of the US housing bubble. That may be the reason Vancouver real estate is vulnerable, or, it might be, as Robert Kavcic, an economist at BMO Capital Markets says, “By pure coincidence of course, the last time the Canucks suffered a heartbreak game 7 of the Stanley Cup final (1994) was just before red-hot Vancouver house prices tumbled more than 26%.”
If Vancouver (and other Canadian) housing prices crash, Canadian banks may not look so sound anymore.