As the spring market fast approaches, this past month has been a media frenzy. Maclean's first print issue in March featured a cover with a family walking up to a burning house, with the headline "You're About To Get Burned - Canada looks exactly like the US before its devastating housing crash - maybe even worse" splashed across the front. Days after this issue was released, The Star retorted with "Canada's Real Estate Market To Cool, Not Crash". The National Post published their two cents with "Ghost Of Fannie Mae Haunts Canada's Housing Agency" and "Why We're In Trouble If Housing Craters". The Globe contributed with "Home Sales Seen Rising, Prices Dipping In 2012 and "Carney Sees An End To Rock Bottom Rates".
I can only imagine what an average Canadian reader must think. The discrepancies and differences in opinion are from different ends of the earth. I can't say that I'm right, and anyone else is wrong, but what I can offer is my hands on opinion of what we see happening, and what I think will happen. So, I'm going to pick this apart for you - Realtor style. My three-part article will address the fears of the Canadian housing market following in the tragic steps of the American Housing Crisis. We're going to look at three of the main Canada versus the U.S. comparisons - household debt, interest rates, and housing prices.
Part II - Interest Rates
We are just getting out of having the absolute lowest mortgage rates available in Canadian history. The media was in a frenzy, pitting banks against the broker channel, and dissecting everything related. The rates were very low, however, we cannot negate the restrictions that came with these low rates - I think this is a defining factor between Canada and the U.S. These low rates came with restrictions such as pre-payment privileges, penalties, and amortization stipulations. What makes us different, is that these rates were directed to a particular type of mortgage holder - one that can commit to the structure, payment amounts, and term of this mortgage. This helps ensure that people do not go rate crazy and borrow as much as possible, spreading themselves thin.
I've noticed that our lenders and insurers have tightened their lending ropes as of late. There are restrictions on square footage, beacon score requirements upwards of 700, and niche lenders. I conducted a little experiment the other day. I emailed a mortgage broker in the U.S., letting them know that I wanted to buy a property. I told them I was a Canadian citizen wit 5% down. They assured me it was no problem to obtain a mortgage, even told me it would be low documentation. This is what enticed Americans to spend credit with no ends - the ease of obtaining a mortgage.
Sub-prime mortgage lending was a huge contributing factor in the downfall of the US housing crisis. The amount of sub-prime borrowers jumped dramatically at the peak of the housing crisis - you could walk into a convenience store and obtain a mortgage. Once the market started to dramatically plummet, the amount of the mortgage surpassed the value of the homes. The United States offers non-recourse mortgages, which means that the lender is only entitled to the collateral, and has no recourse on what is owing after that. So, for the people who had a mortgage amount of $500,000, and the home was only valued at $300,000, they could walk away from the situation with no recourse on the difference. This was logical, right? People were literally packing their bags and walking away from their homes instead of paying into empty value. The government had to step in and help the pieces that Fannie Mae and Freddie Mac could not pick up.
Scary - yes. Do I think we can follow in the footsteps of our downtrodden neighbours? Absolutely not. Aside from the fact that our lenders are so stringent, our insurers follow the same suit. CMHC, Genworth and Canada Guaranty have a more gruesome process than most banks, especially when it comes to sub-prime lending. Our sub-prime lenders weigh heavily on the property when dealing with clients with tender credit. If they wouldn't buy the property themselves, they are not funding it. This is the same outlook the insurers have on sub-prime borrowers.
You can't simply compare low rates to low rates. The dynamic of borrowing and lending is different in Canada than it is in the U.S.. Canada's conservative mortgage lending strategies are our saving grace.
Part II - Interest Rates
We are just getting out of having the absolute lowest mortgage rates available in Canadian history. The media was in a frenzy, pitting banks against the broker channel, and dissecting everything related. The rates were very low, however, we cannot negate the restrictions that came with these low rates - I think this is a defining factor between Canada and the U.S. These low rates came with restrictions such as pre-payment privileges, penalties, and amortization stipulations. What makes us different, is that these rates were directed to a particular type of mortgage holder - one that can commit to the structure, payment amounts, and term of this mortgage. This helps ensure that people do not go rate crazy and borrow as much as possible, spreading themselves thin.
I've noticed that our lenders and insurers have tightened their lending ropes as of late. There are restrictions on square footage, beacon score requirements upwards of 700, and niche lenders. I conducted a little experiment the other day. I emailed a mortgage broker in the U.S., letting them know that I wanted to buy a property. I told them I was a Canadian citizen wit 5% down. They assured me it was no problem to obtain a mortgage, even told me it would be low documentation. This is what enticed Americans to spend credit with no ends - the ease of obtaining a mortgage.
Sub-prime mortgage lending was a huge contributing factor in the downfall of the US housing crisis. The amount of sub-prime borrowers jumped dramatically at the peak of the housing crisis - you could walk into a convenience store and obtain a mortgage. Once the market started to dramatically plummet, the amount of the mortgage surpassed the value of the homes. The United States offers non-recourse mortgages, which means that the lender is only entitled to the collateral, and has no recourse on what is owing after that. So, for the people who had a mortgage amount of $500,000, and the home was only valued at $300,000, they could walk away from the situation with no recourse on the difference. This was logical, right? People were literally packing their bags and walking away from their homes instead of paying into empty value. The government had to step in and help the pieces that Fannie Mae and Freddie Mac could not pick up.
Scary - yes. Do I think we can follow in the footsteps of our downtrodden neighbours? Absolutely not. Aside from the fact that our lenders are so stringent, our insurers follow the same suit. CMHC, Genworth and Canada Guaranty have a more gruesome process than most banks, especially when it comes to sub-prime lending. Our sub-prime lenders weigh heavily on the property when dealing with clients with tender credit. If they wouldn't buy the property themselves, they are not funding it. This is the same outlook the insurers have on sub-prime borrowers.
You can't simply compare low rates to low rates. The dynamic of borrowing and lending is different in Canada than it is in the U.S.. Canada's conservative mortgage lending strategies are our saving grace.
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