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Mortgage lender Equitable shows why banks love housing boom

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For a while now, outside observers have sent dire warnings about a Canadian housing bubble, writing pieces like this in the national media.

More recently, bank economists have piled on, freaking out about the "Canadian condo craze," and even finance minister Jim Flaherty admitted that he worries about young Canadians being the last condo buyers before the bubble pops.

But you still don't hear much from the bank execs themselves. They occasionally make vague statements, but never really offer any strict warnings signs. For them, it's a tricky game. With rock-bottom low interest rates, Canadians are more than happy to borrow, and the banks need all the help they can get to boost their profits in this rickety economy.

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Vilify them all you want, but the banks say they don't have much reason to worry because their mortgage losses are practically non-existent – very much like their consumer lending portfolios.

The latest numbers from Alt-A (er, sub-prime) mortgage lender Equitable Group only buttresses their argument. In the first quarter of 2012, Equitable's mortgage payments that were 90 days or more past due – so the most likely to default – was only 0.25 per cent of the its total mortgages outstanding. That's down from 0.33 per cent a year ago, and from 0.42 per cent at the end of 2010.

On top of that, Equitable posted record first-quarter profits as its single-family mortgage originations jumped 35 per cent, helping to send its total single-family portfolio higher 20 per cent year over year. (A number of mortgages were also renewed.) "We can't tell you how pleased we are with the single-family growth rate," chief executive officer Andrew Moor said on a conference call.

Equitable is just a small fraction of the Canadian mortgage business, with single family mortgages totalling just $2.3-billion, so you can imagine what the Canadian banks see, with mortgage books that run at many, many multiples of this. Plus, their mortgages are higher quality, so they have even less reason to worry about losses.

In fact, the Office of the Superintendent of Financial Institutions even met with the banks a little while back and told them to stop originating some of their riskier mortgages, creating what Mr. Moor referred to as "scuttlebutt" on the Street. It just so happens that this move helped Equitable, because it created less competition for the higher quality mortgages with in the Alt-A category, which typically go to new immigrants or the self-employed.

But no one is talking about what happens in, say, five years, when rates could be far higher, or we could be back in recession. Every time I offer these scenarios to Canadians, they always explain why our housing situation is nothing like what happened in the U.S. leading up to 2008.

Absolutely, I say, but it's not like we haven't had a housing crash before. Just look at what happened in Toronto two decades ago.

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"We share the view that there is an elevated risk in the Canadian housing market today relative to a year ago," Mr. Moor said, going a bit farther than the bank execs, but not exactly going past vague terms – though he did add that he is "certainly concerned" about the condo market.

Overall, though, he said he's "pretty positive" on the market and is "relatively comfortable" with single-family detached homes, even in Toronto.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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