September 25, 2008 Eric Shackleton The Canadian Press
Merrill Lynch is challenging the prevailing view that Canada's housing and mortgage markets are more stable than their U.S. counterparts, warning that households in this country are so indebted that it's only a matter of time before we see a major downturn here as well.
In a report issued yesterday, Merrill Lynch Canada economists said many Canadian households are more financially overextended than their counterparts in the United States or Britain.
They said it's only a matter of time before the "tipping point'' is reached and the housing and credit markets crack in Canada.
The Merrill Lynch Canada report by economists David Wolf and Carolyn Kwan acknowledges that the analysis is more pessimistic than the prevailing view.
Prime Minister Stephen Harper, in British Columbia for the federal election, responded to the investment firm's warnings by repeating his assurances that Canada's economy is in good shape.
"I think our housing market is in a strong position (and) consumer markets, as well, are stronger in Canada than the U.S. and the position taken by our financial institutions.''
"Of course, we have seen that this market has somewhat weakened in the last 12 months but we will not see such a situation here as in the U.S.''
The National Association of Realtors reported yesterday that the U.S. median sales price in August fell 9.5 per cent to $203,100 US, the largest decline on records dating to 1999.
Many economists have said repeatedly that Canada's housing and banking sector is much more stable than its American counterparts and unlikely to crash -- since it didn't spike in recent years because of many differences between the two countries.
Benjamin Tal, an economist with CIBC who has been closely following the ups and downs of the housing industry, said yesterday he sees no "trigger'' threatening Canada's housing and mortgage market.
"To see a crash in the housing market you need a trigger.
"The trigger in 1989-1990 was extremely high interest rates.
"The trigger in the U.S. was subprime mortgages. We're still missing the trigger for Canada,'' Tal said.
However, Merrill Lynch -- whose U.S. parent is one of the biggest victims of a crisis in financial markets that is rooted in the American housing and mortgage meltdown -- said Canadians should be wary.
Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007 -- meaning they're carrying more debt than households in the United Kingdom and not far off the peak U.S. shortfall in 2005 -- just before the subprime mortgage crisis erupted.
Gregory Klump, chief economist with the Canada Mortgage and Housing Corp., said there would need to be a spike in interest rates or massive layoffs before the housing market would take a tumble.
Right now, Klump said, "we have a stable labour market'' and interest rates are low.
"There's no distress sales in Canada, not like in the States.''
The Merrill report says housing prices are now falling and inventories of unsold homes are rising sharply.
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