Boom or Bubble?

With the insane record-setting activity in the real estate market over the summer, there is a lot of buzz about whether the market bubble is going to burst or if this is an ongoing boom.

If you've been a part of any a conversation on this topic, discussion has probably come up about the U.S. market.

Creditors are losing their shirts, home owners are defaulting on their mortgages at unprecedented rates, the state of the economy and frightening 'living on credit' approach is pushing a crash in the U.S. real estate market.

How can it not affect the Canadian market?

The Toronto Star recently featured an article that has some great insight that I support...

"U.S. housing woes are not headed here."

'Oh Canada, Get a load of this boom!" What a great headline, especially since I found it on the front page of the real estate section of the Chicago Tribune (Aug. 5, 2007).

Americans are quite envious of our housing market as they suffer through the subprime mortgage meltdown. I'm often asked if the same thing could happen here and I'm happy to say the answer is `no,' at least according to Peter Vukanovich, president of Genworth Financial Canada, which, next to CMHC is the largest mortgage insurer in Canada.

Vukanovich says there are many important differences in lending practices and regulatory systems in the two countries. The Genworth head explains that subprime mortgages typically have higher interest rates and fees than "prime" mortgages and often include features such as "teaser" rates that offer the homebuyer very low payments for a short time, or the option to make interest-only payments.

As well, whereas Canadian lenders are very strict about debt ratios, income verification and credit checks, the American lenders are not nearly as diligent.

Vukanovich notes that here in Canada, most loans are made for five-year terms with fixed monthly payments that will not jump quickly to unaffordable levels. Also, mortgage interest is not tax deductible here, so we have an incentive to pay off our mortgages as quickly as possible.

Another important difference in Canada is that mortgage default insurance is required under federal financial services law for those making less than a 20 per cent down payment. As a result, 95 per cent of the loans made in Canada are considered "prime" lending quality versus a much smaller number in the United States.

By acting as a lender's "second set of eyes," mortgage insurers see that underwriting standards are consistently applied to about half the market – approximately 450,000 mortgages in 2006.
Mortgage default insurance works by transferring the homeowner's risk of default from the lender to the mortgage insurer. It also benefits Canadian homebuyers by allowing them to obtain loans at lower interest rates than would otherwise be charged if lenders retained the risk of default.

"If Canada had a U.S.-style system, at least one-third of all Canadians who currently have low-cost insured prime mortgages would pay higher interest rates and additional fees," Vukanovich says.

"All told, Canadians can take comfort in knowing that our mortgage default insurance system is one of the most efficient, safest and stable in the world. "

The whole U.S. house of (credit) cards assumed rising housing markets and stable or declining interest rates. Unfortunately, the U.S. has seen the opposite trends.

We're very fortunate to be avoiding that fiasco here in Canada, although we are certainly feeling the side effects on the stock market side. For years, there were just two mortgage insurance companies in Canada, but we are starting to see some new players. I think competition is great, but we must ensure that responsible lending standards prevail.

The bottom line is that our lending practices are solid and our housing market remains strong and insulated from the woes of our neighbours to the south.

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PS - With the dollar at par, now is a great time to purchase a vacation property in the states!

Who do you know who is ready to buy or sell? If you or anyone you know is ready to take the first step, share my blog with them or give me a call. info@markrichards.ca

Regards,
Mark
(416) 728-2499