Canadian Mortgage Bravado: Pride Goeth Before The Fall
Canadians looking for a US mortgage read this site so I’m potentially going to injure their pride. That’s not my intent. I want to warn Canadians about the impending mortgage meltdown in Canada- it comes from overconfidence; we can tell you all about that in America.
The Canadian Press reports from June 5, 2008:
Interest rates at or near historical lows combined with low unemployment and recent changes that allow people to buy houses with less money down and pay off mortgages over longer periods resulted in 68.4 per cent of Canadians in the housing market in 2006.
That’s up from 65.8 per cent in 2001 and 60 per cent in 1971, according to the latest Statistics Canada data.
The increase comes despite the fact that the cost of housing in many cities across the country has gone through the roof, outstripping inflation by far, while median incomes have essentially flatlined.
Does that sound familiar, Californians? Floridians? Arizonans? The author ripped this page from the irrationally exuberant playbook of 2005, written by then NAR economist, David Lereah. We were puffing out our chest in America, proud of our high home ownership rate and resilient real estate market. Buyers bought homes in San Diego, panicked that they “wouldn’t ever get in”.
The overall result has been a small increase in the percentage of Canadian homeowners who spend more than 30 per cent of their gross income on shelter costs, according to Statistics Canada census data.
But latest CMHC figures show a sharper spike in mortgage-carrying costs in terms of after-tax income. In 2007, average household spending on monthly mortgage payments had reached 37 per cent of after-tax income, up from 32 per cent in 2006. “That’s significant – mortgage carrying costs are increasing,” said Recher.
“This burden is heavier on the shoulders of first-time buyers because they don’t have the equity.”
Most analysts, however, see little comparison between the Canadian housing market and its American counterpart, where hundreds of thousands of homeowners suddenly found themselves in way over their heads, creating a financial meltdown
Uh, oh. Again, we’ve heard all of these warning signs before. When economists and bankers start talking about a “paradigm shift” you gotta start worrying. I spoke with an Edmonton home owner today who reported that their oil rich boom-town is experiencing a “leveling off” in the real estate market. When real estate levels off,the fringe borrowers, in the Canadian example, the stretched first-time home buyers fee the pinch. Lower equity gives them a smaller incentive to “work it out” when times get tough. Canadians who don’t live in the oil rich Western provinces and rely on a strong US dollar for exporting, are going to feel it first.
“Canadian underwriting standards by lenders and mortgage insurers are much more thorough than they are in the United States. Canadian lenders are much more conservative.”
Okay. That’s true. Canadian banks and mortgage lenders have fewer creative options than we had in the States.
One key factor in the rise of home ownership is the relatively new option of mortgages amortized over 40 years.
Paying off loans for homes over a longer period means much higher total interest costs, but lower ongoing monthly payments. The effect is increased affordability. Growth in such long-term mortgages has been nothing short of dramatic, figures show.
Ouch! That’s how we got in trouble. We extended amortizations and repayment terms causing home owners to have less “skin in the game”
Adrienne Warren, a senior economist and manager with Scotiabank, said easier access to mortgages certainly make the economy more vulnerable, but it would take a sharp spike in interest rates – she estimated five percentage points – coupled with a general economic downturn to see people in danger of losing their homes.
Adrienne, Adrienne! Your singing the US mortgage market shuffle. We found that just 1.5%-2% interest rate spike hurt the market!
While shelter costs for homeowners have risen, they remain higher than those for renters. Roughly 40 per cent of renters spend 30 per cent or more of their income on shelter.
I said this, in 2005. If incomes don’t rise, housing prices will drop. The least invested Canadian homeowners will bail first, leaving the market in a shambles. Just look at us.
Not everyone NEEDS to own a home.
_____________________________________________
This information provided by:
Brian Brady, Mortgage Planner
World Wide Credit Corp.
Phone: (858) 503-2318 Fax: (858)-605-4230
