Analysts at Merrill Lynch say that they are worried about the outlook for the Canadian housing market, as ownership rates have risen and affordability has declined.

Merrill notes that Statistics Canada recently reported that homeownership in Canada rose to 68.4% as of the 2006 Census, up from 65.8% in 2001. This is both the highest rate and the largest five-year increase since at least 1971, it says, adding, “The broad resilience of the Canadian housing market to date implies that Canada’s homeownership rate has probably kept going up since the 2006 Census; as a result, it seems safe to say that, for the first time, the rate of homeownership in Canada is higher than in the U.S.”

“Owning one’s home is part of the archetypal American (and Canadian) dream. Public policy in both countries has long made a higher rate of homeownership an important goal, and indeed the fundamental mission of agencies like CMHC and Fannie Mae. From this lens, Canada’s high and rising homeownership rate, both outright and relative to the U.S., looks to be an unqualified good thing,” Merrill observes.

However, it’s not so sure. “Not that we’re against more people owning their homes, far from it. But perhaps the paramount lesson of the U.S. bust is that greater homeownership is only good if it is sustainable,” it explains. “As we’re now being vividly reminded, getting families into houses that they cannot ultimately afford is quite a bad thing, for the family, the neighbours, the market, the economy and indeed society. Higher rates of homeownership are not always and everywhere good.”

Merrill says that the fact that homeownership in Canada is now close to the rate at which the U.S. ran into trouble is not itself a worry, as the sustainable rate in any given country will depend on myriad structural factors, from the economic to the sociological.

“We cannot say with confidence what Canada’s ‘sustainable’ rate is. We do, however, have a sense that the marginal new homeowner in Canada is having to extend ever further, which is a warning sign on sustainability,” it says.

“House prices have outpaced incomes, clearly compromising affordability,” it says. Also, while Canada hasn’t seen the loosening of lending standards that happened in the U.S., Merrill reports that it has been hearing of rapid recent growth in longer-amortization mortgages. Also, StatsCan reports that 17.8% of owner-occupied households were spending more than 30% of their income on shelter costs (a common ‘strain’ threshold), up from 16% five years earlier and the largest proportion since 1981.

Its detailed annual Canadian housing market study will not be out until next month, however, Merill concludes, “we can say that we’ve not been this concerned about the Canadian housing market outlook in many years.”