Canadians have recently been receiving a crash course on economics, especially during the federal election when party leaders making the economy their No. 1 priority. Of course, not all that was said was placed in its proper context as a result of the highly-charged atmosphere of politicians fighting for coveted seats in the House of Commons.
Add to the mix the federal election in the U.S., where the sub-prime mortgage debacle has made things far worse than in Canada, and you have a situation that may create unnecessary alarm. The reality is that the Canadian economy is in relatively good shape despite all that is happening elsewhere.
Take into consideration that one month of bad stats or one bad economic indicator does not portend a housing market collapse. Similarly, a few months of positive numbers does not create a robust market.
WinnipegREALTORS® monitors a number of reliable market indexes each month and compare them with the same month a year ago. If a trend begins to emerge over the course of a few months due to changes in a number of these indicators, then some objective commentary can be made as to what is happening. There is certainly no reason to jump to any quick conclusions when there is volatility in the world financial markets.
Our financial institutions in Canada have behaved far more responsibly here than in the U.S. and other countries. Last month, the World Economic Forum’s Global Competitiveness Report ranked Canada as having the world’s most sound banking system, while the U.S. was ranked 40th and Britain 44th.
The following are a number of points made by Will Dunning, the chief economist of the Canadian Association of Accredited Mortgage Professionals (CAAMP), regarding the Canadian mortgage market.
He said Canada has performed better than the U.S. in economic terms. The percentage of adults that are employed shows real gains over the U.S. since 2006. While our percentage has being going up from the same point they were in 2006, the U.S. has been going down. Canada has also done a better job in providing economic growth that is more diversified and reliable and generates highly-qualified home buyers with strong credit worthiness.
Scotiabank estimates Canadians’ equity position is close to 70 per cent of the value of residential property, while in the U.S. it has presently eroded to less than 50 per cent. Canadians also have low debt-service ratios. Statistics Canada shows more than 90 per cent of Canadian homeowners have gross debt-servicing ratios below the 32-per-cent threshold. Scotiabank also estimates that consumers’ total debt-service burden has not worsened during the past decade — it remains close to eight per cent. In contrast, the U.S. has seen its debt-service burden nearly double to 14 per cent.
Data from the Canadian Bankers Association, which covers seven major banks, shows just 0.27 per cent of residential mortgages are in arrears. This equates to roughly 10,300 out of 3.85-million mortgages. This data represents about 85 per cent of all residential mortgages in Canada.
The Bank of Canada estimates about two per cent of sub-prime mortgages in Canada may be in foreclosure. And, 20,000 to 25,000 Canadian homeowners may be in arrears out of the 8.05-million homeowners in the nation.
Dunning said interest rates for five-year fixed rate mortgages (after lender discounts) are currently 5.25 per cent to 5.5 per cent, almost identical to the average for the past five years (5.2 per cent). Similarly, variable rate mortgages when discounted are running at 4.25 per cent to 4.5 per cent, right along the lines of the average for the past five years (4.3 per cent). So for most Canadian homeowners, future renewals will not result in increased mortgage payments. It is worth also noting that the majority of Canadian households have experienced income growth since they took on a mortgage.
Finally one of Dunning’s key points —clearly differentiates our banking system from the American system — is that most Canadian mortgages remain on the lenders’ books so there is a strong incentive to maintain high credit standards. In contrast, widespread securitization in the U.S. has caused a breakdown in the incentive to control risk. When mortgage originators did not have direct accountability for credit quality, credit quality was abandoned.
And, not all markets are the same. Winnipeg’s MLS® market was singled out by CREA’s economist Gregory Klump as one that would perform far better than others across the country due to the strong diversified economic activity and immigration numbers stimulating housing sales and construction.
Winnipeg has already reached the $2-billion level in MLS® sales dollar volume, which only happened for the first time in 2007 and then a month later in the year. But Winnipeg like other markets in the country will be affected by the downturn in the economy as weaker global demand becomes a drag on Canadian exports.
The Bank of Canada in lowering its trendsetting interest rate this week to 2.25 per cent, said our national economy will only grow by 0.6 per cent in 2008 and by the same amount in 2009.
Manitoba is in a better position than other provinces to weather this downturn given its diversified economy, but the province will not escape without some economic dislocations.
Calvin Lindberg, president of the Canadian Real Estate Association, made the following observations on the economy:
“REALTORS® in Canada these days face lots of questions about the real estate market, real estate price bubbles and the value of a home. That’s because we are at the end of an unusually active period in Canadian real estate. Last year was a record year for many of the things we use to monitor the real estate market, including the average MLS® residential price and the number of units sold through the MLS® systems of local real estate boards and associations.
“But Canada is not headed for the major real estate adjustments that are reported in many regions of the United States for several reasons.
“Canada's housing market has, for years, defied predictions of a slowdown. From 2002 to 2007, average home prices rose at about 10 per cent a year nationally. One reason is that mortgages with a long amortization or payback period were introduced in Canada in 2006. They have had an impact on the Canadian housing market. Since 2006 at least 40 per cent of home buyers have opted for a mortgage with an amortization period of more than 25 years.
“One survey indicates consumers take the longer term because of lifestyle. They want the flexibility to pay down faster — if possible — but at the same time have some available funds to enjoy their level of lifestyle.
“Also in 2006, Canada Mortgage and Housing or CMHC began providing insurance to lenders for interest-only mortgages. These are also known as zero down mortgages.
“It’s these types of mortgages that have created confusion or concern about the Canadian housing market following the trends in the United States. The problems in the U.S. can be traced back to sub-prime mortgages. Those are loans given to a home buyer with less than perfect credit, or to a home buyer who lacks the paperwork to prove an income that can support the mortgage payments.
“While these mortgages may not seem like a good idea to begin with, lenders in the United States with investment money were making loans to almost anyone who asked, and charging higher interest for these riskier loans. The assumption was that constantly rising house prices in the U.S. would compensate for any lending mistakes.
“The U.S. lending crisis started when U.S. housing prices started to slide and U.S. interest rates began to rise. Many borrowers ended up in trouble and defaulted (on mortgages). Mortgage lenders, in turn, started to run into trouble and a number have now gone bankrupt or closed.
“Many of the companies making the sub-prime loans were also not holding onto the mortgages, but instead sold them to other companies such as hedge funds and pension funds looking for higher profits. Often, the loans were packaged together and sold to investors.
“As more and more consumers defaulted and the mortgage loans started going into default, the financial world was affected around the globe. Investors and lenders started demanding higher interest rates to make loans or stopped making loans entirely. That initiated what is now called the credit crunch.
“While the Canadian real estate market may be cooling from the record sales and price levels reported in 2007, there are a number of reasons why we’re not on the same track as the U.S. housing market.
“First, the vast majority of mortgages in Canada are insured — in the United States they were not.
“Second, new home buyers in Canada are subject to the same credit criteria as any other buyer. There are no exceptions made just because the borrower is buying their first home.
“Third is the default rate. It was estimated that by the end of June 2008, a quarter of all U.S. sub-prime loans were in default. According to the Canadian Bankers Association, a record low number of Canadian mortgages (approximately one per cent) were in arrears at that time.
“Fourth, there has been little evidence of speculation buying in Canada. Buyers in Canada generally live in the home they buy. That wasn’t the experience in the United States. Speculating buyers can push up prices in their belief they’ll make their money as prices continue to rise.
“The bottom line is this: unlike the United States, the Canadian housing market has not been artificially driven by bad lending practices. Our long-term fundamentals are solid. Canada has a growing population. Our energy and commodities are in high demand. That doesn’t mean we’re immune to an economic slowdown, or a housing slowdown. Housing is a major motor in the Canadian economy, so a slowdown in the economy affects housing — and the opposite is also true.
“Also remember, as you hear or read reports about the Canadian real estate market, that housing is local. Even within any Canadian city, housing market conditions may be different from one neighbourhood to the next.
“That’s one of the key reasons that, if you are buying or selling in today’s market, you should use the services of a local REALTOR®. They know your market.”