September 24, 2008 / 5:58 PM / 12 years ago

UPDATE 1-Canada PM rejects Merrill housing-market warning

(Adds details)

VANCOUVER, Sept 24 (Reuters) - Canada’s housing market is in good shape and there is no risk that it will collapse, Prime Minister Stephen Harper said on Wednesday after a report from Merrill Lynch Canada suggested otherwise.

Merrill said the absence of a credit crunch in Canada like the one in the United States should be cause for concern, not comfort, and added that the market is too optimistic about prospects for the housing sector and the overall Canadian economy.

Harper was quick to pour cold water over that notion when asked about it by reporters during a campaign stop in Vancouver, British Columbia, ahead of the Oct. 14 general election.

“I don’t accept that conclusion, not at all,” said Harper.

“Firstly, we have seen that the housing market and the construction market are much stronger in Canada than in the United States. We don’t have the same situation here with mortgages as was the case in the United States with the subprime mortgages there. And so therefore I think our market is in a much stronger position.”

Merrill Lynch Canada economists David Wolf and Carolyn Kwan said households are overextended and it may only be a matter of time before they crack.

“How can it be good that mortgage debt is growing at a double-digit pace against an asset class now seeing deflation?” Wolf and Kwan wrote in a note.

Growing household financial deficits, basically the growing inadequacy of savings to fund real asset purchases, has been bigger in Canada than in the United States or Britain, Merrill said.

Merrill said household net borrowing in Canada was 6.3 percent of disposable income in 2007, which is more than in Britain and not far off the peak U.S. shortfall of 7 percent in 2005.

“These data imply that the Canadian household sector is now overextending itself as much as the U.S. or U.K. ever did, challenging the consensus view that Canadian lenders and borrowers have been far more conservative through the cycle,” the economists wrote.

The Merrill note says that housing prices have started to fall in Canada while inventories of unsold homes are rising, which Merrill said will not be a transitory phenomenon.

“We believe that markets remain overly sanguine with respect to the prospects for the Canadian housing market, the financial sector and the overall economy.” (Reporting by Allan Dowd and Frank Pingue; Editing by Peter Galloway)

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