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OTTAWA (MNI) - Canada's housing market continues to perform strongly, though its high sales and prices are a mixed blessing because they help underpin the domestic economy but give rise to concerns about growing household indebtedness.

Mark Carney, the governor of the Bank of Canada, terms Canadian household debt the country's biggest domestic economic risk, but says the danger is not imminent and pales behind the foremost risk to Canada's economy, contagion from Europe.

The largest contributor to Canadian household debt also is the largest single contributor to the consumer spending that has been Canada's economic mainstay during the 2008-2009 recession and to the present: the C$1.079 trillion residential housing sector.

Statistics released by The Canadian Real Estate Association (CREA) show home sales in Canada are still on the rise, though the pace of increase is slowing. Data released by CREA in November show the national average house price is C$360,396, up 4.6% from the same month last year.

The hotspots in Canada are the provinces of British Columbia and Ontario, which contain almost 50% of the Canadian population. Average prices in British Columbia have surged 11.0%, while prices in Ontario have increased nearly 9.0%, since November 2010.

The Canada Mortgage and Housing Corporation (CMHC) reports the seasonally adjusted annual rate of housing starts for November was 181,000 units, down from the187,200 units it reported for November a year ago. Mathieu Laberge, Deputy Chief Economist at CMHC's Market Analysis Center see this level to be more consistent with the current economic conditions.

With regard to housing activity, data released by the CMHC show housing starts moderating in 2012 to 186,750 units from the 191,000 units forecasted for 2011.

However, sales of existing homes (through MLS) are expected to increase marginally in 2012 to 458,500 from 450,100 units forecast for 2011.

After significantly slowing in 2011, single detached starts are expected to increase to 83,750 units in 2012 from the expected 82,200 units in 2011. The expectation in 2011 follows an increase to 92,554 units in 2010.

Comparatively, multi-family starts are expected to decrease to 103,000 units in 2012 from 108,800 units in 2011.

The corporation also forecasts the average home price in Canada will reach C$368,200 in 2012, from C$363,900 in 2011.

Considering different categories of households, research released by Royal LePage, a leader in the Canadian real estate market, shows the national average price of a detached bungalow increased 7.8% to C$349,974 on an annual basis in the third quarter. Similarly, prices for standard two-story homes on an annual basis rose 7.7% to C$388,218 and standard condominiums rose 5.7% to C$239,300 in the third quarter.

A report released by the Canadian Association of Accredited Mortgage Professionals (CAAMP), says residential mortgages have increased rapidly during the past decade, averaging about 10% per year, but have slowed since then to less than 7.0% per year.

"Canadians tend to be very careful with mortgage borrowing and we are doing a lot of it in response to low interest rates," said Will Dunning, chief economist at CAAMP in an interview. The Bank of Canada indicates that it's historically low 1.0% policy interest rate likely will remain the same through much of 2012 at least and perhaps well into 2013.

Mortgage debt presently is growing at just under 7.0% per year after increasing at a 7.4% pace in the previous year. It stands now at about $1.1 trillion, as compared with $787 billion four years ago.

Despite the mortgage debt levels today, Dunning believes that Canadians by and large have been prudent in taking out mortgages and have considerable room to absorb the higher interest rates that the Bank of Canada's Carney repeatedly warns will inevitably rise someday.

A CAAMP survey shows 31% of borrowers opt for variable rate mortgages, while 60% hold the more popular fixed rate mortgages. The latter remain protected in the event of interest rates rising by having locked in their rates for a term.

The growth in Canadian mortgage debt is attributed to a strong economy, Dunning writes. A boom in Canada's employment rate in the second half of the past decade delivered a much needed expansion in the housing stock, and remained the primary driver of mortgage debt growth.

"If there is risk it is not about the interest rates, it is about the broader economy," Dunning said.

Diana Petramala, an economist at the Toronto Dominion Bank, said in an interview that "Rising household debt is a concern in Canada, but in spite of being a bit excessive it remains affordable."

She nevertheless is concerned that household debt is growing at double the pace of income, and that the debt-to income ratio is very close to 160%. This is the level that caused trouble in the U.S. and U.K. housing market.

To curb mortgage debt somewhat, the federal government has tightened mortgage insurance rules and has set up constraints on how much one can borrow to purchase a new home. Also by reducing the amortization period to 30 years from 35 years, they have made it a little harder to take out mortgages.

In an interview with MNI, Emanuella Enenajor, an economist with the Canadian Imperial Bank of Commerce (CIBC), says: "Resale data for unit sales activity over the past year has remained relatively flat."

She adds that prices had been trending upwards in the past but the trend has slowed in recent months, as evidenced in a report by CIBC, which states, "overall household credit is now rising at the slowest year-over-year pace since 2002."

The report also says that, when adjusted for inflation, mortgage debt outstanding is expanding at the slowest pace in eight years.

Benjamin Tal, managing director and deputy chief economist at CIBC, dismisses the debt-to-income ratio as being almost meaningless. He prefers a measure of the extent to which growth in credit outpaces growth in income, and finds that ratio has been rising by an average of 0.5% per quarter since early 2010. Tal calls this a much softer pace than the average increase of more than 1.2 percentage points per quarter since the early 2000s.

The past decade saw real household credit growing at a phenomenal average of 8.2%, well above the traditional norm of increasing between 4-5% for the year.

With home prices rising 28% from its cyclical low in January 2009, Tal believes the real household debt problem is a mortgage debt problem and not consumer debt problem.

Statistics released by CIBC show mortgage outstandings are increasing at a 7.0% pace on a year-over-year basis, slowing from the 12% pace it recorded prior to the recession and remains 5 percentage points about the rate of growth of income.

The ratio of sales to new units indicates the market remains balanced, but Tal cautions it could switch quickly with little warning.

What is worth noting is that the increase in mortgage borrowings has increased the total number of mortgages that have a low equity and high debt-service ratio to 4.5%, increasing nearly 2 points in the past five years. Even in this 'vulnerable' category, history shows the default rate well below 1.0%.

Looking ahead, Tal does not see prices nosediving, but does expect to see prices leveling off in the next year or two. Added to that, a rise in interest rates is also expected to see prices decline modestly.

Pedro Antunes, director, national and provincial forecast at the Conference board of Canada, told MNI the housing market has been doing very well given the rates are very low. As a result he sees equity and mortgage debt to have built up over the past years.

"The situation isn't perfect but it isn't till late 2012 early 2013 we perhaps start seeing a problem. How much of a problem it is remains hard to answer," Antunes added.

To echo this concern, the International Monetary Fund, in its latest assessment of Canada has asked CMHC to remain vigilant of mortgage debt levels.

However, research released by Bank of America Merrill Lynch paints a more bearish scenario. The report released on Monday sees home prices falling by 5.0% in the first half of next year on weaker economic growth and an oversupply of condominiums, a "pretty modest contraction by historical standards," Bank of America economist Sheryl King said.

A combination of tough job and income growth environment is expected to reduce housing demand in the first half of 2012, only to end the year flat as economic activity picks up. The bank predicts unemployment rate will hit 8.0% next year.

Spurred by low mortgage rates, Canadian housing prices seem to be overvalued by as much as 10.0%, the report said

King sees most of the correction taking place in the Toronto area, where an abundant supply of condominiums is expected to bring prices lower. The report added, "We estimate there are already enough units in the pipeline to satisfy fundamental demand for the next five years."

** Market News International - Ottawa **

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