Dangers lurk in dearth of solid housing data, economist warns

By Tara Perkins, The Globe and Mail, April 3, 2014 - One of Canada’s top economists is warning about the dangers lurking from the lack of solid data on Canada’s housing market, and he’s pushing policy-makers to do something about it.

In a note to be released Thursday titled “Flying Blind,” Canadian Imperial Bank of Commerce economist Benjamin Tal says “the gap between the importance of the real estate market to the economy and the lack of publicly available information on it is mind-boggling.”

It’s an issue that has frustrated economists for some time, and one that Ottawa has long been aware of.

But Mr. Tal’s note is unusual in its outspokenness. He has chosen to be vocal about his concerns at this point because he sees a window of opportunity for change, with new financial leadership in Ottawa.

“The time to act is now,” Mr. Tal writes. “With fresh players steering our policy ship, the new Finance Minister, the new Governor of the Bank of Canada and the new head of CMHC have an opportunity to chart a course that [will] reduce any risk of a real estate bubble by making data availability a top priority.”

Mr. Tal rattles off a list of statistics that are not publicly available: the dollar value of new mortgages originated in Canada in the last quarter; the distribution of mortgages by credit score; the share of non-conforming loans and their delinquency rates; trends in re-financing and prepayments; the net equity position of new and existing mortgages; the flow of rental activity; the share of foreign investors in the condominium market; the average down payment.

And his list isn’t exhaustive. One example: in the United States data on mortgage applications is closely tracked as a barometer of the market. Such data isn’t available here.

The dearth of data has become more important as economists and policy-makers try to determine just how overvalued Canadian homes are, and what should be done to ensure the market is healthy.

“All agree that the real test of Canadian housing will take place when interest rates start rising,” Mr. Tal wrote. “But how can you determine the level of rate sensitivity if you do not have information on the distribution of mortgages by actual mortgage rates, the level of down-payment and the distribution of borrowers by their debt service ratio?”

During a discussion with The Globe and Mail’s editorial board in April 2012, former Finance Minister Jim Flaherty acknowledged that the government didn’t have a good grasp on the amount of foreign money in the domestic housing market.

“It’s mainly anecdotal, so I don’t have a statistical grasp of it, no,” he said at the time, adding that he had been hearing that a large number of people in emerging economies were paying cash for condos in Toronto or Vancouver.

Last fall, during a wide-ranging discussion in Ottawa in preparation for the government’s fall economic update, economists told Mr. Flaherty that they were having trouble properly assessing the housing market because of a lack of data.

“One of the things that I mentioned was about the investment activity in housing, and the data that is actually present,” Sonya Gulati, an economist at Toronto-Dominion Bank, said at the time. “It’s really hard to capture how much is investment activity in housing versus owner-occupied,” she said she told the Finance Minister. “And in particular, if you want to add and overlay that with foreign investor activity in real estate, that’s even more of a black box. We really don’t have a good sense about how much of the Canadian real estate market is being propped up by foreign investors and the risk that that represents in terms of the overall housing market.”

Mr. Tal is now calling on Canada Mortgage and Housing Corp. (CMHC) to use its database and research capabilities to provide more timely and comprehensive housing information. He says credit bureaus should find a way to incorporate mortgage information into their reporting. The Superintendent of Financial Institutions (OSFI), which regulates the banks, could provide more information about credit and default trajectories, as could the Canadian Bankers’ Association, he says.

“This should be supplemented by much better communication between policy makers, builders and lenders,” he adds.

In the meantime, he notes that banks have access to more data than most average observers do because of their lending portfolios. “They have a good sense of the down payment structure, the risk distribution of borrowers, their equity position, the delinquency structure and more data that is not in the public domain,” Mr. Tal writes.

He suggests that many of the more bearish or pessimistic views of the market are resulting from a lack of good information.

“The ‘Short Canada’ position that is slowly gaining popularity among foreign fund managers is also based on similar partial information,” he says.

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