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.
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