There's no crisis for Canadian lenders

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The cooldown in Canada’s real estate market has left many consumers with a sense of dread. After all, analysts and industry professionals haven’t been shy in comparing Canada’s housing boom to that of the United States before that country’s severe economic downturn.

Add to that the actions of Canadian Finance Minister Jim Flaherty, and it’s easy to see why some consumers might feel alarmed. Flaherty has tightened mortgage rules on four separate occasions, each time trying to rein in what he saw as reckless lending. His latest round of restrictions shortened the maximum amortization term for government insured loans from 30 years to 25 years, as well as decreased the amount homeowners could borrow from 85 percent of the value of their homes to 80 percent. Finally, the amount of spending on mortgages, property taxes and heating costs was set at 39 percent of gross household income. 

These changes have been projected to effectively cut off approximately 5 percent of home buyers from making their purchases.

“It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium,” Flaherty said. “So if it has that kind of a cooling effect, that to me is a good thing.”

But if people really want to see the health of a market, it would be wise to keep an eye on its banks. After all, it was when U.S. financial institutions began to go under that the real trouble started.

Canadian banks posting profits
Despite the cooldown on mortgage activity, Canadian financial institutions seem to be doing just fine. Data from Macquarie Capital Markets shows that market-related revenue and advisory fees will be the highest at Canadian banks in at least five quarters, with institutions like the Royal Bank of Canada posting quarterly profits of as much as 17 percent.

“Despite the myriad headwinds and concerns that the operating backdrop continues to present, the Canadian banking sector is set to end 2012 with another year of solid operating performance,” said Sumit Malhotra, an analyst at Macquarie Capital Markets.

Cooldown doesn’t mean collapse
There’s no doubt that mortgage restrictions have led to a slowdown in the market. The Canadian Real Estate Association reports that existing home sales fell by 0.1 percent in October from the previous month. Meanwhile, Canada Mortgage & Housing Corporation reports that housing starts fell by 8.9 during the same time period.

However, the news coming out of the housing market is not all doom and gloom. While sales are decreasing, so are home prices. If you’re in the market to sell, this is far from ideal, but if you’re looking to buy, there’s never been a better time. The Royal Bank of Canada has released a study showing that price declines have increased home affordability for the third quarter. The RBC’s affordability index shows that a detached bungalow now stands at 42 percent of income nationally, a decrease of one percentage point from the second quarter. Two-storey homes decreased by 1.2 percentage points, reaching 47.8 percent of income. Condominiums stood at 28 percent of income in the third quarter, falling by 0.6 percent.

Meanwhile, mortgage rates remain at historic lows, with the government insisting that rate increases are not on the horizon. For prospective buyers, more affordable homes and low mortgage rates are powerful incentives, despite whatever slowdown the market is experiencing.

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