Tuesday, September 7, 2010

Outlook for the Housing Industry in Canada

To much fanfare, this week there was a report out on the "housing bubble" in Canada.  If you look back in my blog you will see BOLD predictions like this one that were featured on MacLean's magazine and Time magazine from the 1940s until recently.  This is a common prediction in the housing market.

I look at a few statistics that give me comfort. 

Roughly the average income in the federal government in 1980 was $17,000 per year and a house cost approx. $100,000.  Now the average income is $60,000 and the average house is $325,000.  If you do the math, the correlation is eerily similar.  The number are just bigger. 

Canadians never had a subprime mortgage market.  Our fundamentals are much stronger than the US market.  If you look at the underlying problems with US financials, some of them are still much weaker than Canada.  For instance a conventional mortgage is Canada has a loan to value of 75% whereas in the United States it is 90%.  The lowest deposit you make on a home in Canada is 5%, in the US, it is 3.25%.

Subprime is a strang word, as they are what we in Canada would call "High Risk Mortgages".  Most were 0% down, 40 plus year ammortorizations, with superficially low "teaser" rates for an introductory 2 year period and then a balloon payment and a much higher monthly payment in the following three years.  For example, a person would pay $500 per month for 2 years, then have to make a $5000 payment at the end of two years, and their monthly payment would jump to $1000 per month. 

Subprime mortgages comprised about 22% of the US market, whereas a paltry 5% in Canada.  It is essential to remember that those mortgages in the US were usually no document mortgages, whereas Canadians who got "subprime" mortgages had to still qualify with the GDS and TDS.  My wife and I were turned down on a zero down, 40 year amm. mortgage as our beacon scores were not over 700 at the time.  What this means is in Canada, only the best candidates were every offer a subprime mortgage unlike the US where everyone could get access to a mortgage, whether employed or not!

Many mortgages were also negative ammortorization mortgages, meaning each month, instead of you paying down your mortgage (by making a small principle payment), the monthly payments in the US were not even covering the actual interest charged on the loan.  For instance, imagine you have a $300,000 mortgage - in Canada, after 5 years, your mortgage would likely be $275,000, but in the US, the same mortgage after 5 years would be $325,000. 

As fate would have it, CD Howe release their report a few days later to much less fanfare - care to read it, click here!

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