No housing crash coming in Canada
Mathieu | February 12th, 2008 | 3 Comments »A lot of news has been made lately about a housing crash in the United States. Coupled with New Century Financial’s bankruptcy filing, it’s made Canadian homeowners and real estate investors get a bit nervous about the same happening here.
With our economies so closely tied, on the surface it makes sense that what happens there will happen here. But the truth is the exact opposite when it comes to Canada’s real estate health.
Lending regulations in the United States are much more lax than here in Canada. Mortgage lenders were giving people with little or no credit sub-prime mortgages and worse yet, a high per centage of borrowers had incomes that could barely sustain mortgage payments.
A popular strategy amongst U.S. lenders was to offer Option ARM’s (adjustable rate mortgages). These Option ARM’s offered a fabulous teaser rate for a few months or years and then reset to the standard rate. As these Option ARM’s reset, many borrowers found themselves unable to pay their mortgage resulting in a higher than acceptable default rate.
In addition, interest rates in the United States had crept up to the point where the demand for housing had slowed leaving less new buyers to take over these defaulted mortgages.
Even people with great credit and incomes got caught in a bad place. Thanks to record-low interest rates and a hot real estate market, home owners were refinancing and taking equity out of their homes. Again, as interest rates crept up and the buyer market began to dry, these people were left with payments they couldn’t afford, thanks to higher interest rate and no one to buy their house.
Canada’s Bank Act requires lenders practice much more conservative lending habits. The per centage of high-ratio, sub-prime mortgages is much less north of the 49th parallel than in the United States and according to a CIBC world market report (PDF), Canadian mortgages in arrears is at a record-low.
The fact of the matter is, the Canadian real estate market is not artificially driven by an abundance of sub-prime mortgages and poor lending habits.
In fact, the U.S. mortgage crisis benefits the Canadian real estate market. If the U.S. does slip into a recession, we’ll feel the pinch here at home too and that’s encouraged the Bank of Canada to keep interest rates low. Combined with Canada’s growing population, strengthening economy and overall increase in household income, Canada’s real estate markets are primed to continue being solid investments.
