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Benjamin Tal on Mortgage Rates

Benjamin-Tal CIBC’s noted economist, Benjamin Tal, spoke at CAAMP’s annual Mortgage Conference today.  He offered several perspectives and prognostications.  Among them:

  • He predicts December (this month) will be the peak of U.S. mortgage rate resets. 

(A rate reset is when a homeowner’s promotional mortgage rate is replaced with a much higher “normal” rate. Promo [aka.  teaser] rates were widely used in the U.S. and were a key contributor to the subprime crisis.)

  • U.S. resets will continue in large numbers until at least Q3 2008.
  • He calls 2006 the “worst [mortgage] underwriting year in American history.”
  • 40% of homeowners who took out mortgages in 2006 will have negative equity (owe more than their house is worth) by the end of 2008
  • The average rate reset on U.S. mortgages is a whopping 4% higher than the promotional rate!
  • 55% of U.S. subprime defaults are in just 5 cities.

How will all of this affect Canada?  Tal says:

  • There’s no longer much correlation between U.S. and Canadian real GDP growth.
  • As such, there’s been “no sign of a [housing] slowdown in Canada”
  • Canada’s housing market is stable because “we did not play [games] with exotic and risky mortgages.”
  • We’ll move from a sellers’ market to a “balanced” market by mid-to-late 2008.

Where are Canadian mortgage rates headed?  Tal says:

  • If Alberta were a country they’d need to raise their interest rates to tame inflation.
  • If Ontario were a country they’d need to lower interest rates to spur growth.
  • The Bank of Canada is starting to realize that it’s “time to pay attention to this disparity.” (We can assure you the BoC is already watching this closely.)
  • The Bank of Canada “cannot justify to raise interest rates” on a national level–presently at least.
  • Homeowners should therefore be “safe with variable mortgages” for 6-8 months.
  • Inflation will likely start rising in 1-3 years, however, bringing mortgage rates up with it.