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Article comparing U.S. and Canadian housing markets


Rabbitisrich
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The most dangerous time for a country with 5 yr fixed rates must be when rates are near all time lows and prices have already risen to account for it.  Significantly higher interest rates... can people afford the rate reset?

 

Unlike the U.S., where the mainstay of the mortgage market is the 30-year fixed mortgage, the most common mortgage product in Canada is a five-year fixed rate mortgage (with a 25-year amortization period).

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Many of those 5yr mortgages (renewed 12+ months ago) were variable which have an added risk.  These mortgages have an interest rate of Prime - (.5 - 1%).  My mortage is currently prime -1% (1.25%).  If I were to renew today the best I could get is Prime (2.25%).  Fixed mortages would be even higher and future rate increases will make this even worse.  Many of these mortgages were amortized over 20 years so the consumers would experience significant increases in their monthly payments.  The CMHC started insuring Variable rate mortgages in 2004.  

 

Government debt could take a hit over the next few years due to CMHC mortgages foreclosures, adding more pressure to cut back government spending.

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"The most dangerous time for a country with 5 yr fixed rates must be when rates are near all time lows and prices have already risen to account for it.  Significantly higher interest rates... can people afford the rate reset?"

 

These are amortizing mortgages, & the rate was set 5 years ago when the 5 year rate was much higher than it is today. As the outstanding is also lower, the significantly higher reset simply results in something close to what you're allready paying.

 

The major risk reduction is from floating rate mortgages suddenly converting into 5yr fixed rate. The home owners additional cash requirement from higher rates doesn't occurr, & surplus cash goes into fixed rate investments (GIC's) earning the home-owner a spread (GIC - mortgage rate). Refinancing volatility safely comes out of the housing market.

 

SD

 

   

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I have read the article and the data WAS a correct description of the Cdn. vs US mkt however the  Cdn mkt has changed significantly in the last 24 months. A very significant percentage of new purchase mortgages issued in Canada in last 2 years have been issued to buyers with very little skin in the game the banks in Canada are quite wisely not taking any of these high risk loans on their books they are passing the risk to the CMHC and to Genworth.

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The rates probably play the biggest role with the group of people who have less than 20% down on their house, where they need the low floating rate to get approved for a mtg.

 

The 0 down, 40 year amort. mtgs were only available for a little while in Canada, but they're still getting around it these days. In theory, the home buyer needs 5% down, but the bank is lending that 5% to the buyer some other way. So it's effectively a 0 down mtg still. The mtg is passed on to CMHC and so the bank has less skin in the game. Of course, the home buyer has no skin in the game in this case. The 2009 stat that shows the %age of LTVs in the > 80-90% range would be very interesting to see. IMO, that's the group that is causing the bubble in the major cities. I think the avg salary / house price ratio in Toronto is over 5 (according to Garth Turner). Affordable house prices are generally around the 3 range. Affordability is definitely being affected in Toronto. Vancouver is even worse, just take Toronto's numbers and multiply by a factor of 1.25 -1.5 at least.

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  • 2 weeks later...

Cdn real estate market is overvalued compared to historical valuations - sell, trim holdings, raise cash...  Cdn banks may not be as profitable in the next couple of years and their balance sheets will be under siege.

 

http://www.financialpost.com/story-printer.html?id=2368846

Piet Eichholtz, a professor of real estate finance at Maastricht University in the Netherlands, came to a similar conclusion when he studied real estate prices in an Amsterdam neighbourhood from 1628 to 1973. He found that home prices required 350 years to double in real terms.

 

If you assume home prices should rise in line with inflation, you come to a dire outlook for Canadian real estate.

 

Taking figures from 1990, 1995 and 2000, and boosting them by inflation during the intervening years, suggests the national average home price should check in around $200,000 -- a third less than the current figure.

 

More sophisticated calculations arrive at similar estimates. David Rosenberg, chief economist at the money manager Gluskin Sheff in Toronto, examined home prices in relation to personal incomes and residential rents. He concluded that prices are between 15% and 35% above levels that are consistent with fundamentals.

 

"If being 15% to 35% overvalued isn't a bubble, then it's the next closest thing," he writes.

 

 

"The most dangerous time for a country with 5 yr fixed rates must be when rates are near all time lows and prices have already risen to account for it.  Significantly higher interest rates... can people afford the rate reset?"

 

These are amortizing mortgages, & the rate was set 5 years ago when the 5 year rate was much higher than it is today. As the outstanding is also lower, the significantly higher reset simply results in something close to what you're allready paying.

 

The major risk reduction is from floating rate mortgages suddenly converting into 5yr fixed rate. The home owners additional cash requirement from higher rates doesn't occurr, & surplus cash goes into fixed rate investments (GIC's) earning the home-owner a spread (GIC - mortgage rate). Refinancing volatility safely comes out of the housing market.

 

SD

 

   

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