Canadian Mortgage News & Canada's Mortgage Trends

This is Why. This is Why. This is Why We're Hot

The LA Times says Canada's real estate market is "hot-hot-hot."  They credit:  Low unemployment, a booming Canadian dollar (not sure about this one), and modest speculative buying. 

In addition, they suggest the American mortgage "fiasco" can't happen here.  Well that's good news!  Apparently it's because Canada has no "sub-prime lending market." 

But wait.

Isn't the Canadian subprime market growing at 50% a year? 

Isn't it tracking towards $20 billion in funding and an estimated 133,000 loans a year?  Geez.  Before you know it us Canucks will have a subprime mortgage market!

Real Estate Reality Check

Need some doom?  Here's a story by the Edmonton Journal about how us "free spending" Canadians are pushing our real estate market to an eventual crash.  In actuality there's some truth to it, but the thing I'm excited about is the "no-interest mortgages" they say are "on the horizon."  No interest?  Now that's mortgage innovation!  Wink.

Mortgage Bytes

• CIBC economist, Benjamin Tal, thinks the Bank of Canada may postpone any potential rate increases.  He says, "If you are shopping for a house and mortgage, you basically saved yourself 25 basis points because of (the U.S. mortgage) crisis."
• How big is Countrywide (America's biggest mortgage lender who's flirting with insolvency)?  Countrywide funded $463 billion of mortgages in 2006.  That's 2/3's of all mortgages in Canada combined!  Here are some FAQs about Countrywide from Holden Lewis.
• Is Saskatchewan due for a mortgage meltdown?  Star Phoenix story
• Subprime lender, Xceed, expects no disruption in funding new mortgages for at least "several months," despite troubles at its main financier.
• Here's a Guide to the Credit Crunch by the Globe & Mail

No income? No credit score? No problem.

MCAP has re-launched its line of "alternative" mortgages under the Eclipse name.  Eclipse mortgages all feature low qualification and credit score requirements.  In fact, as long as you have 25% down, there's no minimum credit score required at all, and you don't even need to prove income.

Contact us or your favorite mortgage planner for more information.

September Rate Hike Now Questionable

A September 5th Bank of Canada rate hike is now in doubt, despite inflation hitting a 4-year high.  Meanwhile, America's biggest mortgage lender is fearing bankruptcy and Canadian bond rates are dropping.

Here's what people are saying now:

• "One result of the turmoil in the financial markets is that an interest rate hike by the Bank of Canada in September, which was seen as almost a certainty only a week a ago, is now seen as unlikely."  Reuters
• "At this point I think all bets are off for a Canadian rate hike at the September meeting." Stefane Marion, assistant chief economist at National Bank Financial via Canada.com
• "Raising interest rates is at cross purposes to providing liquidity to resolve a credit crunch."  Vancouver Sun / Edmonton Journal
• "On the rate expectations side, we've pretty much taken out the tightenings expected from the Bank of Canada."  Mark Chandler, fixed income strategist at RBC Capital Markets  Reuters
• "As long as the commercial paper market remains seized up, the Bank of Canada is highly unlikely to raise the policy rate on the Sept. 5 decision date."  J.P. Morgan analyst Ted Carmichael via Reuters

Even if rates do stay put in September, however, the Bank of Canada could still raise them at its Oct. 16 or Dec. 4. meetings--if inflation doesn't subside.  That would increase variable mortgage rates accordingly.

As for fixed mortgage rates, with bond yields falling, fixed rates may come down a bit in the short-term.  National Bank, for one, lowered its 5-year posted rate today by six basis points.

Three Years and Counting

Canada's real estate market is about three years behind the American market in terms of valuation, so says Merrill Lynch economist David Wolf.

We're catching up fast though.  Wolf says that one year ago Canada's market was 13.1% undervalued.  Today it's only 3.4% undervalued.  (Editor's note:  We've requested a copy of this report to ascertain the valuation methods.)

This trend could accelerate further thanks to the advent of Canada's own subprime mortgage market.  Subprime lending is growing rapidly in Canada, and it's making mortgages more accessible to all. 

This, in turn, may add upward pressure to home prices.

Cities in Canada that are currently overvalued, according to Wolf's research, include Victoria, Edmonton, Vancouver, Calgary, and Saskatoon.  None are yet in"bubble" territory but Wolf believes Edmonton is getting closer at 29% above fair value. 

For some perspective, in 1981 Calgary was 101% overvalued.  In 1989 Toronto was 66% overvalued.  Last year, Miami, FL was 62% overvalued.

Thunder Bay, ON and St. John's, NL are the most "undervalued" Canadian cities, according to Wolf's findings.

Globe & Mail Story

Mortgage Bytes

• Is Edmonton's real estate market topping?  "The advantage has definitely moved from the seller to the buyer," says CMHC's Richard Goatcher. Unsold homes number 8,183 in Edmonton, over four times the 1,856 in July 2006.
• Oil-rich Fort McMurray, Alberta is still humming, however.  It's population is just 75,000 but it's average home price is an incredible $605,495.
• Older people like condos, and Canada has never had a greater percentage of older people.  (See Chart)  Could these demographics boost the relative value of condos in coming years?  We'll keep our eye out for the evidence and keep you posted.
• Trump Mortgage is dead.

Changes to Your Credit Score

Important new changes will soon affect how your credit score is calculated.

Fair Isaac, who sells the formula by which most Canadian's credit scores are based, has tweaked their model.

Shopping multiple lenders on your own will now no longer have as big an impact on your score.  Now, all mortgage lender inquiries within 45 days will count as one inquiry.  It was previously 14 days.  (If you use a mortgage broker to shop for your mortgage they usually make only one inquiry anyway).

In addition, Fair Isaac says, "By studying large samples of Equifax Canada's credit reports, we found that consumers are opening more credit lines, carrying higher balances, and generally using credit to a greater degree than ever before."  As a result, don't be surprised if credit scoring formulas tighten up a bit (become slightly more conservative) to help lenders better manage their risk.

Mortgage Bytes

• Real estate is on fire in certain GTA neighbourhoods.  High-end home prices in Forest Hill, for example, popped 16.8% last year.  Condos in Mississauga jumped 32.7%.  Toronto Star article
• Nationwide, house prices are up 11.2% over last year.  However, CREA says "Recent research shows that ownership rates among younger Canadians and newer Canadians have been on the decline, in large part due to lower incomes and difficulty saving funds for a down payment."  Edmonton Journal story
• Ever think of buying a 2nd home in Las Vegas?  You might find a good deal.  1 in every 69 homes there are in foreclosure.
• Gordon Pape notes that it's common for lenders to require that you include property taxes in your mortgage payments.  No interest is charged on this money, however.

When Will it End?

Are you tired of hearing about U.S. subprime mortgage problems?

Well, get used to it suggests TD's Deputy Chief Economist Craig Alexander.  "I think the [subprime] weakness is going to drag on longer than people think," Alexander said in the Globe & Mail Saturday.

Peak delinquencies often don't appear for up to 25 months after subprime mortgages are issued. Therefore, "it will be well into 2008, if not the end of 2008, before all of the worst news about the subprime market has been announced," he feels.

Famed distressed-company investor Wilbur Ross, who recently invested $50 million into bankrupt American Home Mortgage, agrees. 

American Home Mortgage Daily Stock Chart

"We don't think [subprime] problems are over with at all," Ross says. "In the second half of 2007, $170 billion of adjustable rate mortgages will go from teaser rates to normal market rates. Next year $400 billion will go."

"No one is making teaser loans [now]," he says. "The rate shock is going to become quite severe, and people aren't going to be able to afford the payments. Typically, payments were more than 40% of borrower's income and generally will be going from 45% to 55% or 60% of their income, (so) it's just not going to be possible for people to pay that."

Longer-term, however, Ross feels that subprime market will thrive once again.  "It's a business that has validity but at a much smaller size," he says.  BusinessWeek article

In Canada, the subprime market is thriving now.  In fact, it's growing 50% a year thanks to prudent underwriting and big demand.  Fortunately, Canadian homeowners aren't as overextended as our American neighbours (yet anyway).