New opportunities are opening up when it comes to investments in home loans from our neighbor to the north, Canada, but at the same time worry continues to mount that they are long overdue for a downturn.
While the market paused for a while the shift took place, it reopened in July and there traditionally has been a strong U.S. investor component when it comes to the bonds, Fitch senior director Vanessa Purwin said.
There are some differences between the previous contractual covered bonds and those with a legal basis in Canada. Mortgage insurance no longer supports this market and while some countries allow covered bonds backed by a legal structure and those done contractually to both be issued. Canada is no longer allowing contractual ones. Also the investor base is opening up as the legal structure draws European investors.
Canadian banks’ overall earnings are somewhat stable and RBC, a key player in the market, has some of the highest ratings on a global basis, said Justin Fuller, a director in Fitch’s financial institutions group.
The institutions have capital levels above Basel III global accounting rule standards, he said.
But on the other hand, Fuller said analysts do anticipate a slowing in the country’s mortgage market.
“We generally believe credit quality is near a cyclical peak,” because it has been so strong for so long, he said.
Much analysis of the sector is focused on how hard a landing the market may be in for if its mortgage/housing sector is indeed peaking, about to take a downward turn.
With the majority of the mortgage market exposure backstopped by the Canadian government, uninsured mortgage loan-to-value ratios below 80% and a tightening in government underwriting, there is hope for a soft landing for the overall market.
But there are factors that could lead to a hard lending as well, according to a Fitch presentation on the market last week: rising, high levels of consumer indebtedness that are not sustainable, home prices that may be on an unsustainable path, and a potential for an increase in unemployment that would put pressure on debt service capabilities.
Fitch modeled five stress scenarios for the country’s housing and mortgage market and found under all but the most stressful scenario they were able to maintain minimums for regulatory capital, Fuller said.
He said the country’s employment levels have been strong but a large portion of the gains in employment have been tied to construction, which would be vulnerable to a real estate market downturn.
Stefan Hilts, director at Fitch, said while models show the country is nationally about 20% overvalued “that doesn’t mean is that we think prices are going to fall 20%.
“Even in a very bearish scenario would take some time for prices to fall,” he said, suggesting there would not be declines of more than about 10% for even a very negative scenario.
There is some variation in market performance in Canada, notes Fitch senior director Suzanne Mistretta. “Some markets are weaker than others,” she said.
