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Does Canada Have Too Many Homebuyers?

U.S. home ownership rates have reached 18-year lows but don’t expect Canadian levels to follow anytime soon.

Even if Canadian home sales continue to slide – and there are plenty of signs the market might actually be turning around – it could take some time before home ownership rates are actually impacted.

The risk to the Canadian economy is the buyers entering the market today are on the fringe, much the way they were in the United States before the market crashed there.

“High ownership rates are endogenous to an economic cycle, prices are raising and that makes housing lok like an attractive investment,” said David Madani, Canadian economist with Capital Economics.

With that high penetration rate comes the likelihood of people entering the market with smaller down-payments and generally weaker credit ratings. “You might get proportionally more first-time buyers,” said Mr. Madani.

Canadian home ownership levels are not tracked as closely as they are in the United States but it is believed we are now close to having 70% of households in an ownership position – an all-time high. We were at 68.4% based on the 2006 census and the percentage is expected to climb the next time data is released.

Meanwhile in the United States, home ownership levels continue to fall as consumers still face tight credit conditions and an overhang of shattered confidence in housing as an investment still exists. Home ownership rates are now at 65% in the U.S. after reaching 69.2% in 2004.

The Canadian Real Estate Association said last month that home sales were down 6.9% over the first half of the year from 2012 but over the last four months sales have been climbing. It’s still unclear what the effect will be on ownership rates.

The impact of four sets of mortgage rule changes in Canada during this housing cycle may have blunted the market to some degree but the effects of such measures as a lowering of amortization lengths from 40 years to 25 years also appear to have been worked through.

Barriers to entry into the Canadian market are still not that great. The minimum down-payment is only 5% and anybody with a 20% down-payment can get a loan backed by the federal government – guaranteeing a rate close to 3% on five-year fixed rate closed mortgage.

Phil Soper, chief executive of Royal LePage Real Estate Services, says the tick up in home ownership can be partially attributed to a social shift which has seen younger consumers set up a home even before they were married.

He doesn’t see the same danger in the marketplace for people entering the housing sector as the United States where he says some mortgages were set up based on “criminal behaviour” in some cases.

“These people were given Ninja-style loans – no income, no jobs or assets,” said Mr. Soper, about the U.S. “I don’t think we are innocents in Canada as it relates to the growth of the subprime mortgage sets, they were the fastest growing segment of loans in 2004-2007 but it just represented a tiny part of our market.”

Mr. Soper said lending standards have tightened around the world and that’s the case in Canada too. “The financial institutions themselves have injected their own conservatism into their lending practices.”

The bottom line is as long as housing prices continue to go up, Canadians will see their homes as a good place to park their money, says Doug Porter, chief economist with Bank of Montreal.

“More Canadians are deciding to take the plunge,” said Mr. Porter, also citing still low interest rates. “Fundamentally, you also have more young people deciding to buy the condo they live in rather than renting.”