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Housing Finance Market Overview

In Canada, housing finance is mainly raised from banks but also specialised non-depository financial institutions. The Royal Bank of Canada takes the largest market share in the residential mortgage market. Mortgage Brokers have an important intermediation role as about 31 per cent of all mortgage transactions were processed through mortgage brokers in 2007. The housing finance market has seen a moderate growth since the year 2000. The mortgage debt to GDP ratio increased from 39.9 per cent in 2000 to 53.9 per cent in 2008.

The Market from the Perspective of the Demand Side

In Canada, the maximal loan-to-value (LTV) ratio of conventional mortgages equals 80 per cent. Loans exceeding this ratio have to carry Lenders Mortgage Insurance and are granted up to a maximal LTV ratio of 95 per cent. The largest Mortgage Insurer is the public Mortgage Insurance Fund of the Canada Mortgage and Housing Corporation (CMHC), a government housing finance agency. The competitors are US-based insurance companies. In 2007, about 60 per cent of all mortgages taken out were fixed interest loans. This indicates a pronounced shift to variable or adjustable interest rates as their share almost doubled since the year 2000. The Canadian government subsidises the housing market indirectly as the CMHC enjoys a government guarantee.

House Price Development

House prices have risen considerably with an average annual growth rate of over 8 per cent from the year 2000 to the peak in the middle of 2008. Since then up to the middle of 2009 house prices have fallen by around 8 per cent.

Refinancing Instruments

Deposits are for the banks the main source of funding for their mortgage market activities. The specialised non-depository financial institutions bundle mortgages and resell them to investors as mortgage backed securities but also banks refinance by securitising mortgages. About 20 per cent of all mortgages are securitised. Most of the securitised mortgages are backed and/or issued by CHMC on behalf of the government of Canada. Banks can issue since the year 2007 Covered Bonds. Their share in the market is still marginal though it is assumed to increase rapidly.

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