Soft landing expected
Canada’s real estate market remains “relatively solid” and should experience a “soft landing” despite the current slowdown and fears of overbuilding in the condominium segment, the country’s leading bankers said Tuesday.
Speaking to a RBC banking conference in Toronto, the country’s top bankers said they don’t expect a dramatic downturn like the one in the United States about five years ago.
The bursting of the U.S. housing bubble is considered a major cause of the credit crunch that swept Wall Street and then the global economy in the fall of 2008, after interest rates on sub-prime mortgages rose and defaults soared.
By contrast, sub-prime mortgages have been less common in Canada and real estate prices have trended upward for the most part — except for a few months during the 2008-9 recession and in some economically disadvantaged areas.
“Our expectation is that the overall real estate market in Canada is still relatively solid,” Royal Bank (TSX:RY) CEO Gord Nixon said Tuesday.
Despite reports that suggest Canadian housing is in crisis, he said the pullback is limited to a couple of markets, notably Vancouver.
“We have seen a slowdown in sales and we’ve certainly seen a slowdown in mortgage demand but price levels are relatively stable,” he said, adding that other than debt to disposable income, most indicators are in line with historic standards.
“So our expectation is we’ve got this sort of soft landing scenario on the real estate side.”
The head of Canada’s largest bank said he expects RBC’s consumer lending growth will slow to mid single digits but it should see a nearly double-digit increase in commercial loans.
Other banks are also seeing softening demand for consumer lending, with National Bank (TSX:NA) forecasting a 15 per cent reduction in the growth of retail lending this year in Quebec and a 30 per cent drop in Ontario.
Nixon said Royal has relatively small exposure to the condominium market at $1.2 billion of a $700-billion balance sheet and has requirements that protect it from troubled lenders.
“We’re not overly concerned with respect to condo itself because our relative exposures are quite small — on a relative basis, the smallest of the Canadian banks,” he said.
However, Nixon noted that a significant decline in the overall real estate market would have broader impact across the economy, which would hurt the banking industry.
Gerry McCaughey of CIBC (TSX:CM) said the bank hasn’t seen credit problems in condo construction but a slowdown could be a fairly significant economic event.
“Pure math says that a soft landing, if it means you go back historic levels of activity, that we’re going to have some softness in our economy,” McCaughey said.
“... That softness doesn’t necessarily come out in mortgage defaults, it comes out in employment softness and consequential unsecured consumer lending softness.”
Potentially offsetting the impact of the residential construction slowdown is new energy related infrastructure spending in Canada over the next five to seven years, McCaughey said, pointing to the Lower Churchill hydro power development and oil pipelines.
Bank of Montreal (TSX:BMO) CEO Bill Downe told the conference that BMO deliberately limited its exposure to the Canadian condo construction market at $700 million after watching some of the problems surface in the United States in 2007 and 2008.
The bank is active in the U.S. mortgage lending market in the Midwest through its Harris Bank subsidiary.
He doesn’t expect Canadian homeowner debt to keep growing at previous levels, which will avoid an “outright collapse in the market.”
“In fact, house prices may just stagnate. Condominium prices may just stagnate for a couple of years. And that’s the definition of a soft landing,” Downe said.
Downe predicted the overall U.S. housing market will show considerable strength this spring, stimulating commercial loans.
After a strong fourth quarter, Downe is anticipating that the American economy will be much stronger this year, which will put upward pressure on interest rates in both the U.S. and Canada.
“I think the U.S. economy is going to perform much better in 2013 than people are anticipating,” he said.
Scotiabank CEO Rick Waugh said he also foresees a soft landing for the Canadian condo market, which poses the greatest risk.
He watches 90-day delinquencies very carefully for signs of deterioration. “It’s elevated above 2007 levels but only a bit...it probably will come up a little bit but at levels that are well within our risk appetite,” Waugh said.
The Scotiabank (TSX:BNS) CEO denounced suggestions that Ottawa could privatize Canada Mortgage and Housing Corp., which he described as an integral part of the Canadian housing system that helped to ensure the country survived the housing crisis unlike a similar U.S. entity.
“It ain’t broke, it worked, it met the biggest stress test in our lifetime. Why fool around with it? It’s not a Fannie Mae.”
Ed Clark, president and CEO of TD Bank (TSX:TD), said he remains pessimistic about Europe’s ability to turn its problems around.
Meanwhile, he said Canada’s long period of growth that surpassed the U.S. is over, assuming politicians don’t make decisions to reduce short-term expansion.
“I’m more positive on the United States than I am on Canada in growth numbers,” Clark said.