Tuesday, August 28, 2007

Canadian real estate and mortgage market unlikely to follow U.S. example

Last week several Canadian subprime lenders announced rate increases and a general tightening of lending guidelines, making if harder and more expensive for subprime borrowers to get loans. This was the result of an increase in lender's cost of funds due to problems in asset backed commercial paper market -- a direct impact of the collapse of the subprime mortgage market in the U.S.

At this time there is no signal that would indicate that our real estate market in Canada will follow the same path as the real estate market in the U.S. The Canadian economy is performing well, the job market is stable, the interest rate environment is generally stable and real estate prices continue to rise unlike real estate prices in the U.S. which are declining. Also, mortgage lending in Canada is far more conservative than lending has been in the U.S. Firstly, there are far fewer subprime mortgages in Canada as a percentage of all mortgages. In Canada, subprime loans account for about 5% of all mortgages vs 20% in the U.S. Further, most borrowers in Canada (approximately 2/3), take out 5-year fixed rate mortgages -- the figure is the reverse in the U.S. With a fixed a rate mortgage the borrower can count on the fact that his mortgage payment will not change for 5-years. With a variable rate mortgage, an increase in the Prime rate can impact the borrowers ability to make payments at any time. Add to that the prevalence of 'teaser' mortgages in the U.S. that gives borrowers a low rate introductory offer that they could enjoy for 2-years after which time they would have no way of making their mortgage payments and it should come as no surprise that their mortgage industry has collapsed.