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More evidence of a runaway housing market

A new report sends another signal that policymakers may be falling behind the housing curve in Canada.

(Illo: Alberto Ruggieri/Getty)

Here’s more confirmation of the thesis that the housing bubble may be getting out of hand and is potentially in line for a hard landing. In “Rate Bait,” a research report just released by BofA Merrill Lynch, economist Sheryl King writes:

“Mortgage insurance rule changes by the Department of Finance over the past three years have barely offset the decline in rates …. Most Canadian housing indicators continue to defy expectations of a slowdown. Existing home sales are on track for a decent increase in June, building permits are back above natural household formation, home prices continue to set new highs, and Canadian household leverage has now passed that of their US counterparts.”

“Indeed, mortgage-rate discounting continues to show a household sector that faces a strong incentive to increase leverage,” she adds.

That is, when debt service ratios are calculated using the discounted mortgage rates actually charged by banks (about 125 percentage points below posted rates), the average Canadian homeowner is paying just 25% or so of income on mortgage payments, far below the 32% benchmark used for mortgage-insurance qualification. This indicates there may still be considerable scope to take out mortgages. The mortgage market “is still very stimulative,” concludes Ms. King.

Her conclusion reinforces the view that the Department of Finance may need to keep tightening restrictions on mortgage credit and/or the Bank of Canada may need to raise its rates, as I talked about recently in ” Stop the housing bubble before it’s too late.”