The subprime mortgage market in Canada will grow much faster than the traditional market in the years ahead, CIBC World Markets Inc. predicts in a new report.

The subprime mortgage market is currently rising at an annual pace of more than 50% — by far the fastest growing segment of the mortgage market, says CIBC in the report. “The Canadian mortgage market is in transition. Recent innovation in mortgages, along the line of what is already available in other countries, is a clear reflection of an evolving market. And this is just the beginning,” it says. “Over the next five to 10 years, innovation in the mortgage market will accelerate at a pace not seen before in Canada.”

CIBC predicts that, “The mortgage market of the future will be almost unrecognizable when viewed against today’s standards. Lenders will face more flexibility, alongside steeper competition and increased risk. Consumers will enjoy increased options and better access to home ownership.” It notes that increased competition is already evident, “as growth in mortgage lending by non-bank mortgage providers is now exceeding growth in banks’ mortgage totals outstanding.

“Overall, look for originations in the non-conforming market to rise by an annual average of 20% in the coming 5 years — more than double the pace expected for prime mortgage lending,” it forecasts.

“At 5% of new mortgages, the non-conforming mortgage market in Canada is still small in comparison to analogous mortgage markets in the US, the UK and Australia. And the likelihood that sub-prime providers in Canada will soon become household names, as is the case south of the border, is still slim. However, it is a rapidly growing market,” the report notes. “Foreign players are aggressively marketing their sub-prime offers in Canada, and the evidence to date suggest that they are succeeding in penetrating this underserved and high risk/return niche of the mortgage market.

“More established creditors are also becoming more open to servicing the Alt.A/near prime market, as evidenced by recent acquisitions made by some large Canadian financial institutions. Competition in this segment of the market will only intensify in the coming years, in the form of aggressive marketing tactics, price competition and innovation in product design,” it says.

“In the next five years, originations in the nonconforming market in Canada are projected to double in size, with additional 270,000 households that otherwise would have been priced out of the market, becoming homeowners,” it says. “The growth in the nonconforming market will introduce even more pricing tiers and product types, which will help move the mortgage market closer to a pure price rationing, or risk-based pricing state.”

However, it also notes that the growth of this market will not be smooth. “Macroeconomic factors and regulatory considerations will add an element of volatility to this young market,” it says. “But given the current environment of shrinking margins in the prime business, the growing importance of the broker channel, and aggressive entry of foreign players, the non-conforming market is set to continue to expand. The genie is out of the bottle.”