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DBRS's Loke Sees Risk of `Modest Correction' in Canada's Housing Market
Huston Loke, co-president of the DBRS Ltd. rating company, said he expects a “modest correction” in the Canadian housing market as price increases outstrip income gains.
The relationship between home prices and average income in some areas has “gone out of line in some of those markets,” Loke said in an interview today at Bloomberg’s Ottawa office. “There is a risk of modest correction or perhaps a pullback.”
Loke, 36, said the risk of a “full-blown” housing crisis as was experienced in the U.S. is “extremely low” because of differences in regulations that make it more difficult for Canadian homeowners to walk away from mortgages.
Canadian home prices posted their biggest gain in ten months during June, the Teranet-National Bank Composite House Price Index showed. Prices rose 1.5 percent during the month and 13.6 percent from a year ago, according to a report released Aug. 25 by National Bank Financial.
The Bank of Canada predicted in July that housing will cut 0.1 percentage point from growth next year, after contributing 0.6 point this year. Governor Mark Carney last year warned households in a speech that they should be ready for higher rates.
Loke said Canada’s home price-to-income ratio is now about 5-to-1, up from a historic average of about 3-to-1.
Credit Cards
The central bank said in a report last year that almost 10 percent of Canadian households could become “financially vulnerable” if interest rates rose more quickly than bond yields suggested at the time.
Loke also said the loss rate on credit cards monitored by DBRS climbed to 6 percent from about 3 percent during recession. That rate has since stabilized and will remain there until at least 2012, he said.
Securitized debt -- which is backed by credit card, automobile loan and similar payments -- will grow at a modest pace this year, Loke said.
“We have passed the low point,” Loke said. “There has been some activity this year that was about double what it was last year. We’ve probably bounced off the bottom, but we think growth will be modest.”
Total securitized debt fell to C$102.4 billion ($99.1 billion) in June, down 14 percent from the same month last year, according to a DBRS report. The drop in the amount outstanding is explained by older securities maturing, he said.
To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.
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