7 comments on The Round-Up: April 13th 2007
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7 comments on The Round-Up: April 13th 2007
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Re: Canadian subprime mortgage market to remain robust despite U.S. fallout, says Mortgage Architects
Glad to see you finally found something about how the sub-prime fiasco is affecting (or not affecting) Canada. Also kudos for a round-up full of Canadian content. Keep it up!
I think it's inevitable that the housing market in Canada will be badly affected by what is going on in the US, even though lending practices never stooped as low here as they did in the US and Canadian borrowers did not overextend themselves as far. I cover the US situation in order to give Canadians advance warning of what I see as an inevitable credit crunch.
The tightening of credit standards currently beginning in the US has very much further to go, which is likely IMO to leave many people without access to credit at all in a nation that has been addicted to it for a long time. The same is also true in Canada, even if it takes us longer to get there.
I would suggest to anyone who may be thinking of selling real estate here to do so quickly, and to anyone who is overextended to pay down debt if at all possible. Renting is a far better bet IMO than living in a home in which one has little equity. Rent can be thought of as a fee for someone else to take the property price risk for you, and I think that risk is extremely large at the moment. The real estate market can become illiquid very quickly, potentially leaving people stuck in negative equity.
Why will the housing market in say (southern Ontario being your neck of the woods) be badly affected by credit tightening in say (LaJolla, California)?
The fundamental metrics (price:household income; price:rents) are much more reasonable than in the so-called bubble areas in the US.
Why should anyone who has a fixed rate mortgage interest rate of (say) 5.5% pay down debt at the expense of maintaining a cash cushion or emergency fund?
The rent/buy/sell decision involves more than the numbers generated by a spread sheet.
The meltdown in the subprime market in the US is already affecting the lumber industry in BC. No one's buying homes, so no one needs to build any more which means all those lumber exports from BC won't be needed. Whether we get infected with a credit meltdown or not, the US ecomomy will drag all sectors both north and south of the border down with it. The question is, is there anything on the horizon which is going to help cushion the blow? It sure would be nice to believe there was something going to prevent that from happening. It was also nice to believe in Santa Claus.
I believe what Stoneleigh is recommending is not to pay down your mortgage but to get rid of it by selling your property in favour of renting. For myself I'm on a VRM (variable rate mortgage) and considering locking it in for the long term. I'm not over leveraged but I also don't think it's going to be raining fire and brimstone in the near term. However I'm also not entirely convinced that interest rates are headed up anytime soon. The Fed might have to relax rates and let inflation take over for awhile. Of course if Japan and China start dumping the greenback the Fed might have to move the other way to try and stem that tide. I'm almost having as much fun as I would in Vegas.
Easy money was not a localized phenomenon, and credit tightening won't be either IMO, although it may take time to spread from one jurisdiction to another. I would argue that the US in the early stages of a credit crunch, and that the same should happen here within a year (at a guess). Just as irrational exuberance was an over-reaction to the upside, it's converse will be an over-reaction to the downside, meaning very tight money and deflation.
I wouldn't carry a mortgage, even a low fixed-rate one, unless it represented only a very small percentage of the value of the home. Deflation magnifies the value of debt, making it a far greater burden at a time when the price of the asset would be falling and the ability to ensure the means to make payments would become increasingly doubtful. Real interest rates (the nominal rate minus inflation) are very high during deflation, even if the nominal rate is low (ie nominal rate minus negative inflation). In addition, the real estate market can go illiquid very quickly, which can make it very difficut to extract oneself later if it turns out to be necessary.
Of course, there is spillover to Canada from any US problems, but Stoneleigh's position that a credit contraction is imminent is overstated and without merit.
The real estate and mortgage markets are vastly different. Lending standards are more stringent in Canada. Homeownership incidence rates are lower (62% vs 69%), equity in homes is higher (75% vs 53%) and a higher percentage of homeowners are mortgage-free (55% vs 35%).
Canadian Survey of Finances, 2005
This is not to suggest that valuations cannot decline as periodically they do and maybe they will in the near term in certain markets. But any fallout ought to be mild in comparison.
I would agree with Stoneleigh and caution young first time buyers without much of a downpayment to consider delaying a purchase, though.