Ashley Redmond: I'm Ashley Redmond for Morningstar.ca, and I’m here with equity analyst, Dan Werner.
Dan, thanks so much for joining me.
Dan Werner: Thanks for having me, Ashley.
Redmond: In 2012 we filmed a video about the potential housing bubble in Canada. Your concerns at the time were the frothy market conditions. Are you still concerned them?
Werner: The conditions really haven't changed since 2012. We're still in a very low interest rate environment, which has fuelled the housing bubble, and the Bank of Canada has kept its benchmark rate at about 1%. That has led the banks to keep their mortgage rates low. As a result, we still have housing inflation in Canada. Average house prices increased about 20% since 2012 and the reason we still have low rates is [because if] you look at the overall Canadian economy—GDP at 1.7%, 1.8% for the past two years—you saw unemployment about 7%, 7.5% somewhere in that range, the Bank of Canada isn't incentivized to increase rates at this point because of the overall economy. That’s what has led to the housing inflation.
To answer your question, it is still frothy and with the average house price at $390,000, it looks like it's going to keep increasing.
Redmond: Okay. Is there one bank that concerns you more than the others, one that's more heavily involved in mortgages?
Werner: I would say, the banks in order that concern me are CIBC and Royal and Scotia as a close third. [Regarding the] overall exposure of residential mortgages, all the Canadian banks, well at least the top five, have [on average] 55% of their loans in residential mortgages.
If you look at CIBC and compare their mortgage book to their overall tangible capital levels, it's almost 900%. If you look at the uninsured portion, the portion that's not insured by the CMHC, it is still over 250% for CIBC as well as for Royal. So, there is still some significant exposure by the banks to residential mortgages.
Redmond: I think we covered most of the issues, but is there any other issues that the Canadian economy is facing right now that concern you?
Werner: I think when we look at housing in Canada; we take a look at other factors as well. We look at the demographics of what's going on in Canada. I've looked at the net fertility rates and see that it's 1.5 right now, normally in an industrialized country you need a 2.1 to maintain the population. But Canada has been growing in population over the last several years. So where is it coming from? It's coming from immigration.
So we took a look at what the net population growth was and compared that to the housing starts and we came up with a 1.3 persons per new housing start in Canada over the last couple of years, while the average person per household in Canada is currently 2.4.
It seems that the construction is easily meeting the immigration and net population growth and that's a concern.
Another thing that we've looked at is how much construction is a percent of the overall workforce in Canada, and that has been increasing since the financial crisis from about 5.5% to over 7%. During the same timeframe, the U.S. has fallen obviously because construction has fallen off, but even then the U.S. peaked at about 5.5% construction jobs for the total workforce in 2007.
So, construction seems to be a big part of the Canadian economy, and it is a concern if there was some sort of economic shock.
Redmond: And when you take a look at the landscape now, are you more concerned then you were in 2012 and 2013?
Werner: Well, is it worse now than it was then? I say it depends upon who you are. If you're homeowner during 2012 to 2014, you probably love it. Your house has appreciated very nicely. If you're a homebuyer, you do not love it. It's becoming much more difficult to purchase a home. So, I think it depends on where you're sitting.
Redmond: Okay. And last time we talked about this we received a lot of negative feedback. So, are you the only one that's concerned about this or are there other organizations or people that you can cite that also have similar concerns?
Werner: You know there is constant press about the inflated housing in Canada. The International Monetary Fund has come out and said yes – their economists have said that housing is inflated in Canada. Maybe not to the extent of that other, but they say it's overpriced by about 10%. Then you have the Organization of Economic and Cooperative Development, the OECD and their economists have come out and said that it's overpriced by 30%.
I think it depends upon who you talk to, what their opinions are and what kind of model assumptions that they have. But the general conclusion is that it is overpriced.
Redmond: Okay. Thanks so much, Dan.
Werner: Thanks for having me.
Redmond: To check out more commentary, go to the Stocks page on Morningstar.ca.
