MORTGAGE MARKET UPDATE
Tuesday Nov 01st, 2016
After reading about what’s been happening in the US mortgage markets, you are likely concerned about how Canada is faring. Are we following our neighbours south of-the-border – or are we weathering the recent housing and mortgage storm relatively well?
It can be difficult to make sense of the information we are receiving about the economy. On one hand, we read that we're only in the early stages of a severe recession, while on the other hand we hear that the worst will be over by the mid to end of the year. Although Canada is indeed tied to the US economically, and we certainly have been affected by their recent economic woes, Canada's real estate market has remained somewhere in the middle of these two extremes. Fortunately, Canada's mortgage industry is not nearly in the same precarious position as our neighbours south of the border.
Why? The following points summarize some key thoughts about the differences between Canadian and US mortgage markets:
- Americans and Canadians have different debt tolerances.
- Canadian mortgages are funded, underwritten, and enforced in a completely different manner
- Canadian mortgage markets are fundamentally healthier than the U.S.
- Historically, real estate has remained a solid investment option
Differences in Debt Tolerances
Canadians have always typically been more conservative than Americans, especially in our financial thinking. This is seen in our lower tolerance for debt, which may be one of the things that have saved us during times of economic downturn.
Our conservative thinking also extends to how our banking institutions are run. In the US, with the introduction of loans such as the NINJA (No Income, No Job or Assets) and LIAR (no documentation of job or assets required), almost anyone could get a mortgage. In Canada, however, our banks continue to maintain strict lending standards.
Canada also maintains strict regulatory standards on high loan-to-value mortgages, which are mortgages where the buyer puts less than 20% down. In Canada, these types of mortgages require insurance. In the US, the insurance requirement does not exist, which makes it easier and cheaper for higher risk borrowers to secure loans.
While Canada has only six major banks, the US has thousands. As a result, competition amongst US banks is high, resulting in the need to devise innovative and sometimes risky ways to attract customers. In contrast, Canadian banks are far less likely to employ aggressive products and policies or engage in risky lending practices.
Canadian Mortgages vs US Mortgages
The current mortgage crisis in the US cannot be blamed entirely on sub-prime mortgages. This crisis was also the result of the fact that the US does not have a system that provides stability to the value of mortgage properties. In the US, value is set through speculation – on the potential future value of the property. This has proven to be a risky practice.
A more conservative and safer approach is for mortgages which are treated like securities and secured by the tangible asset: namely, buildings and land.
Canada standardized the way we determine the true value of real estate and mortgage valuation. This standardized data is maintained in national property registries. Available to all real estate buyers and sellers, the registries collect all titles and information about the characteristics of a property, such as boundaries, property transfers, claims, liens, and so on. The US government is now looking at implementing a new system like the one we have here in Canada, as part of their housing recovery plan. We’re obviously setting a good example.
It’s also important to note that Canada's funding model is completely different from the U.S. The majority of mortgages in Canada are held on the lender’s own balance sheets, with only 24% having been securitized. Because of this, our lenders take a more conservative approach.
Further, the majority of these securitized totals in Canada have been done through the CMHC - a Crown corporation with explicit government backing - thus avoiding the ambiguity of GSE liabilities as in the US. Other insured securitizations have been done through private insurers - these also receive explicit government backing through the Canada Mortgage Bond program.
In the US, interest rates change rapidly on a product called the Adjustable Rate Mortgages (ARMs). In Canada, we have a similar product – the variable rate mortgage (VRMs), but these mortgages are constantly getting re-priced so that people aren't caught off-guard years later by rate changes. Also, in Canada, some variable rate products adjust the principal owing, not the payment. Because of this, the shock effect from payment resets in Canada is nowhere close to what has caused much of the problem in the U.S.
In Canada, appraisal standards are generally higher. Appraisals are more likely to low-ball estimates of property value before making a final decision on how much to lend.
It is also important to mention that Canadian banks continue to apply prudent underwriting standards. What this means is that they always carefully check important financial details about potential real estate investors – in particular, their income and job status – something that many U.S. banks neglected to do.
Canadian Mortgage Markets are Healthier
You may have heard that Canada is facing similar stresses to the US in terms of our housing and mortgage markets. The truth is, in Canada, mortgage defaults and home foreclosures continue to remain relatively low.
In Canada, the Bank of Canada has suggested that we may have bottomed out in terms of rate cuts for the foreseeable future. In June, when the Bank of Canada reconvenes to examine its main rate, it is quite likely that Canadian mortgage rates will stay at their current, relatively low levels.
Real Estate as a Solid Investment Option
Real estate has always been, and will continue to be a solid investment option. In these economically challenging times, real estate can be much more reliable in the long run than can mutual funds or other more volatile investments. The value of a property will eventually rise again. For example, a home that may have been valued at $350,000 six months ago and has since fallen to $275,000 will very likely hit the $350,000 mark and exceed it in a matter of time.
The plus side is that buyers now have more properties to choose from and can spend more time shopping around. Gregory Klump from the Canadian Real Estate Association says that "the market has moved from a strong seller's market to one in which both buyer and seller now have room to negotiate the terms and conditions of the transaction." In the recent past, high prices prevented many people from being able to purchase real estate. The current environment brings less demand and fewer bidding wars, and creates a more balanced market condition where affordability is increased. However, Klump adds, "it's important that investors be in solid financial condition and focus on the long term." SS
Denise Dilbey is a Broker with Royal LePage Meadowtowne Realty, Brokerage located at 324 Guelph St, Georgetown, ON L7G 4B5. For more information on the Real Estate Market or a free no obligation “Opinion of Value” on your property, call her direct at 416-919-9802. Denise Dilbey is also a Certified International Property Specialist (CIPS) is a global real estate professional who has undergone specialized training to complete international transactions seamlessly and with reduced risk. Designees have a track record of working successfully with clients worldwide. The CIPS designation is the only international designation recognized by the National Association of REALTORS®. Only REALTORS® who have completed extensive coursework and demonstrated considerable experience in international business are awarded this prestigious designation . #yourrealtorforlife.