I have some exciting news to share. Brennan Valenzuela from RateHub and I will be swaping blog posts once a month! His posts will be featured here and mine will be featred on RateHub’s blog. For those of you who don’t know what RateHub is all about, I’ll fill you in. It’s an easy to use platform where they compare banks and broker rates as well as present mortgage information in a simple to understand way.
Take it away Brennan………..
The Canadian housing market is on edge. Open a newspaper. Click through a blog. Listen to a podcast. The amount of content debating a possible Canadian housing crash is as feverish to TMZ buzzing about Lady Gaga’s latest meat dress. So, why is everyone so concerned? Because a Canadian housing collapse would likely take the economy with it, as evidenced by the US sub-prime mortgage crisis that spurred the financial crash of 2008.
How safe is Canada’s housing market and are we doomed to repeat the same fate?
Ratehub has examined the data and fine print to determine the likeliness a US-style housing burst could occur in Canada. There are qualities of the 2007 US housing market that are present in our current Canadian housing market which should be a concern, however, Ratehub feels the Canadian housing market will cool, not crash due to some very fundamental differences between the two nations.
The similarities: Why we should be worried
Sky-rocketing residential home prices are the most obvious shared similarity between the two markets. During the peak of the US housing bubble, it required 473% of the median household income to purchase a median priced home (approx. $225,000). Currently, the average Canadian home price is $369,677 for a multiple of six times the Canadian family after-tax income of $60,000.
An ultra-low mortgage rate environment also helped fuel the US housing bubble by making it cheap for consumers to borrow money. During the early 2000s, highly favoured 30-year fixed rate mortgages reached record lows in the US. Current mortgage rates in Canada are also at historic lows. For example, 10-year fixed rates are available at an unprecedented rate of 3.79%.
The biggest red flag, which has caused Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney to express concern, is Canada’s rising level of household debt. Today, the average Canadian owes $1.56 for every $1.00 they make – a ratio the US hit during the height of their crash.
The differences: What helps shield us
Canadians are internationally known as conservative people. We’re polite. We say ‘thank you’ and ‘excuse me’. Canada maintains strict mortgage underwriting standards. A stated income mortgage is one where the borrower cannot verify their income through traditional methods. Without ‘hard-proof’ of income, stated income mortgages pose a serious risk to lenders. During the US housing bubble, almost half of subprime mortgages were made up of stated income mortgages as lenders began reducing the qualifications for proof of income. Back in the Great White North, stated income mortgages make up less than 5% of all mortgages.
Subprime mortgages accounted for one in every five mortgages in the market during the US housing crash. US lenders became riskier with their lending practices to increase their bottom line.
One of the most well-known consequences of the US housing bubble was home owners ‘walking away’ from their home because they could no longer afford their mortgage. In Canada, lenders can pursue defaulting borrowers for the full amount.
Finally, mortgage-backed securitization is not as prevalent in Canada as it was during the US mortgage crisis. Our lenders must keep 70% of the mortgages they originate on their balance sheets while only 30% are securitized (sold to investors). Lenders in the US securitized 60% of the mortgages they originated, or double the Canadian equivalent.
What will happen to the Canadian housing market?
The market is poised for a correction, but a soft correction. Although Canada shares many similarities with the housing market that fell apart 5 years ago in the US, there are some notable differences that shield us from the same fate. Canada maintains stricter mortgage practices including borrower qualifications and mortgage products that don’t rely on teaser rates and no-money down.
The following article was written by Brennan Valenzuela for Ratehub.ca, a mortgage rate comparison website that is dedicated to helping and educating first-time home buyers.