Turner Sees Market Peak

market-peak It’s always dangerous to predict turns in the market but MP Garth Turner is sounding the alarm.  He says we’re “likely only a few months” away from the typical Canadian experiencing negative equity.

Negative equity is where you owe more on your house than it’s worth.  Turner says Canada’s real estate market is being supported by 40-year amortizations because many people can’t afford homes without them.  Our market is a house of cards that’s already starting to wobble he says. 

In January, existing home sales plunged a huge six percent.  For-sale listings were up 11%.  And, prices are coming down in formerly hot big cities like Calgary and Edmonton.  Could Turner be right? 

It was a thought-provoking article, but there were a few things in the story we would differ with:

1.  “Canadians banks are no longer discounting the posted rate.”

Not true.  Perhaps they’re discounting less than in the past but they’re still discounting.

2.  “Shaky lending practices that coloured the U.S subprime market are now creeping into Canada.”

Not true, generally speaking.  Lenders’ underwriting standards have been tough lately…and are getting tougher.

Source:  Canada.com

  1. Shaky lending practices are traditionally not the case in Canada. As you may already know, our conservative lending practices limited our exposure to much of the “stuff” we are seeing in the United States.
    Working as a Mortgage Specialist, I am seeing lenders asking for more verifiable documentation to support each and every application.
    Shaky lending practices? Hardly.

  2. I have difficulty reconciling the comments that Canada is different because we did not have loose lending standards like the United States, with the experience of actually living in Calgary and knowing numerous people that own 3,5 or even 9 properties. When I have asked them how they do it, in many cases they reply that they have been buying those properties by leveraging the existing properties that have gone up in value.
    Now I am not a real estate agent and don’t travel in real estate circles. The people I know are engineers, accountants, nurses, pilots, doctors and small business people. So fairly typical white collar people.
    Are these ‘normal’ lending standards? Is it ‘normal’ that every person should leverage up their home to buy another, and then another, and another?
    Another way to say this point is that there were no lending problems in the United States until house prices began to go down. And then it all came out of the woodwork

  3. Excellent blog. Subprime mortgages are commonly quoted to make up 5% of the Canadian mortgage market. But as Garth posted above, 40 years and 0% down seems “shaky”. I live in Victoria BC and talked with a BMO mortgage specialist recently. He said it is common for BMO to make 40 year mortgages that are 5% cash back. That 5% is just added to the mortgage amount. These are people with good jobs and credit, but these seem like “shaky” loans (ie subprime) to me. But that is the only way for first time buyers to afford a place here. They still often have to rent out a suite to make it work.

  4. Hi everyone and thanks for the great comments!
    Noel: You’re absolutely right that most lenders are being a little more careful these days. Lenders are also making fewer exceptions to their guidelines.
    Garth: If the client has few other assets, has a debt ratio at the limit, and minimal prospects of higher income, then I’d agree that 0% down (in general) is a riskier proposition.
    Liverless: You’re right that more people are using leverage these days (real estate investors, Smith Manoeuvre users, free spenders, etc.). I’d hesitate to say “every person” but it does nonetheless seem like a trend. When our housing values decline there will be casualties, but not like in the U.S. The reason is that the big monster below the border has been rate resets. Canadian borrowers, however, are qualified at conservative interest rates. So there’s no chance Canadians will be stuck with interest rate resets they can’t afford, like our American neighbours.
    HP: Overfinancing (over 100%) is something that is concerning if the borrower has a short-term time horizon and minimal prospects for pre-paying their mortgage in the near future. If someone has to rent out their basement then (in our view) they should re-evaluate their plan for 100%+ financing. It probably means they have little breathing room if their unit goes vacant or property values sink and they have to sell.

  5. Garth: Yes, it is very normal for real estate investors to leverage the equity in an existing home to purchase another. You honestly dont expect them to pay one off completely before buying another, right? When bought correctly, tenants pay the mortgage, taxes, and other expenses of the property. Prudent investors account for vacancies and keep funds available to cover these extra expense months.

  6. “I’d hesitate to say “every person” but it does nonetheless seem like a trend”
    That’s fair. I can only speak for my own experience which is a small sample size of course and may not be representative of the whole.
    However, one thing that I believe can be drawn from the US experience is that you don’t really know what is out there until prices begin to fall. Its the old Warren Buffett saying that when the tide goes out you find out who is swimming naked.
    I guess we’ll just have to see how it plays out.

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