A Housing Bubble in Canada?

Dan Werner: Canadian housing is in relative market balance in terms of supply and demand, and we think it's been largely driven by lower and declining interest rates over the last 30 years. With an average home price of approximately $416,000 and nearly five times average income, we think future affordability would be compromised on a going-forward basis in a rising-rate environment as loans renew. We think that increased affordability over the last several years has been demonstrated by the 45% increase in mortgage debt over the last 10 years, but stable mortgage interest paid especially over the last six years.

In terms of looking at potential indicators of a housing bubble, we look at price/average household income as well as price/average rent, which are currently at historical highs and amongst the highest in the world. Another indicator that we look at is loan/value distribution of mortgage loans. And looking at the CMHC (Canada Mortgage and Housing Corporation) distribution of loan to values, we see that they're eerily similar to the loan/value distributions of mortgages for U.S. banks that we saw in 2007, just prior to the housing collapse.

In terms of the banks' exposures to mortgages, the mortgages relative to tangible common equity ranges between 350% and 1000% of tangible common equity compared to current U.S.-bank exposures to mortgages, which range between 140% and 150% of tangible common equity. Among the Canadian banks, we see CIBC (Canadian Imperial Bank of Commerce) as the most exposed and National Bank of Canada as the least exposed to a potential housing correction.