Why Canada's housing market didn't burst

Tuesday, 16 February 2010

Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis.Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. As a result, observers such as The Economist have pointed to Canada as "a country that got things right."

The different housing market outcomes in Canada and the U.S. can tell us something about the underlying causes of the housing boom and subsequent bust in the latter. In particular, they can be used to evaluate the roles that low interest rates and relaxed lending standards played.
Monetary Policy and the U.S. Housing Bust Some observers blame monetary policy for lowering interest rates over 2002-2005, pushing up housing demand, increasing residential investment and raising housing prices. In this view, the monetary-policy induced housing boom thus set the stage for an inevitable housing bust.

The low interest rate policy of the Federal Reserve over 2001-2005 is often cited as a key factor in the U.S. housing bust. The main narrative is that by lowering short-term interest rates, longer-maturity mortgage interest rates are pushed down. This increases the demand for housing, puts upward pressure on housing prices and encourages builders to ramp-up construction of new homes. This leads to an "oversupply" of new homes, which triggered the housing bust in the U.S.

There are also claims that interest rates were too low over 2001-2005, when looked at by both historical standards, as well as compared to those predicted by the Taylor rule (a monetary policy rule which relates U.S. Federal Reserve's ideal target rates to inflation and GDP).
The Bank of Canada made dramatic reductions in its target interest rate over 2001-2002, but one might argue that Canadian monetary policy was not quite as "loose" as that in the U.S. as it maintained a higher overnight rate over 2002 to 2004.

But a case can be made that Canadian and American monetary policies were very similar, at least in terms of the housing market. Estimates put the deviations from the Taylor rule for Canada and the U.S. over 2001-2006 to be nearly identical. In fact, the two benchmark mortgage interest rates move closely with one another until after the beginning of the U.S. housing market crisis, when U.S. rates fell significantly below Canadian rates.

Mortgage interest rates-the main direct channel through which monetary policy impacts the housing market-tracked each other closely in the two countries, but 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).
Relaxed Lending Standards: different subprime lending boomsAnother leading explanation of the housing boom and bust relies critically on relaxed lending standards. This story is linked to the dramatic rise in subprime lending and high levels of loan securitization, which some commentators have argued reduced the incentives for mortgage originators to maintain underwriting standards. This is one area where there was a significant difference between the two countries, both in the size and nature of the subprime market and in the fraction of mortgages securitized.

Subprime lending has grown rapidly in both countries, though the magnitude has been far more striking in the U.S. While subprime mortgages accounted for less than five per cent of mortgage originations in the U.S. in 1994, one-fifth of all mortgages originated between 2004 and 2006 were subprime.But while subprime lending also increased in Canada, it remained much smaller than in the U.S.

The most cited estimate is that subprime lenders had a market share of roughly five per cent in 2006, compared to 22 per cent in the U.S. Moreover, the Canadian subprime market never expanded significantly into newer products, such as interest-only or negative amortization mortgages, whose popularity grew rapidly in the U.S. from 2003 to 2006. Instead, the Canadian subprime market mainly offered products popularized in the U.S. during the 1990s, such as longer amortization periods for loans (from 25 to 40 years), and mainly targeted near-prime borrowers.

Securitization has also been less common in Canada than in the United States, with roughly 25 per cent of Canadian mortgages securitized in 2007 versus nearly 60 per cent in the U.S. The Canadian securitization market has grown rapidly over the past decade, rising from roughly five per cent of mortgages in 1998 to over 25 per cent in 2008.

However, in many ways, the Canadian market resembles the early stages of the U.S. mortgage securitization market, as most securitized mortgages in Canada are backed by an explicit government guarantee. This government guarantee requires limits on borrowers' debt-service ratios and amortization periods, which makes it more difficult for lenders to offer some types of subprime loans.

The subprime story is also consistent with the different pattern of mortgage delinquencies in Canada and the U.S. In the U.S., mortgage delinquencies for both prime and nonprime mortgages began to rise before the recession began and unemployment rates began to climb.
In contrast, mortgage delinquencies in Canada have only recently begun to increase, after unemployment rates started rising and the Canadian and world economies slowed sharply in the fall of 2008. Finally, the relaxed lending story is consistent with the fact that the U.S. experienced a housing bust over 2007-2009 while Canada did not.

While the expansion of subprime lending provided a temporary boost to housing price growth rates, when prices stopped rising, the inability of some borrowers to refinance homes they could not afford led to a spike of delinquencies. The resulting increase in liquidation and foreclosure sales put additional downward pressure on house prices, which, in turn, pushed more borrowers into default. This negative feedback cycle helped push a correction in the housing market into a housing bust.

One possible critique of this argument is that while Canada has not yet experienced a housing bust, it is likely to experience one in the next year. Indeed, a recent Merrill-Lynch- Canada report noted that Canadian house prices over the past decade closely resemble U.S. house prices with a two-year lag. Based on this, they concluded that Canada was also likely to experience large decline in house prices over the coming year.

Canada's smaller subprime market share and fewer households with high LTV ratios, however, suggest that the country is less likely to see the rapid increase in defaults that helped trigger the bust in U.S. housing prices. So far the incoming data suggest that the Canadian housing market is likely to experience a housing market slowdown rather than a bust.

Boom or Bubble?

New numbers build speculation
Monday, 8 February 2010

Housing starts hit a 15-month high according to a real estate report today, as media all across Canada continued to speculate whether the latest gains had stretched too far.
The Wall Street Journal and Canadian Business were amongst the publications recently to ask whether Canada's surprise performance in real estate was the start of a boom in the industry, or instead was nearing a bubble about to burst.

Rather than anything dramatic, however, most experts in the real estate industry still see 2010 as another strong year with a slowing of price gains in the second half as supply increases.
The seasonally adjusted annual rate of housing starts reached 186,300 units in January, up 5.8 per cent from 176,100 in December, according to the CMHC.

In January last year, housing starts began the year with 149,081 units, with activity progressing as the year went on.

Regionally, B.C. had largest increase in housing starts, with a 19.8 per cent jump in housing units in the province. In the Prairie region, the seasonally adjusted rate of urban starts decreased by 4.8 per cent.

Source: www.mortgagebrokernews.ca

Who do you hang out with?

I thought to share this with you from Joeann Fossland


It DOES Make a difference! You’ve heard me (and many others!) say “what you focus on expands”. If you surround yourself news and people who give you more evidence of how tough it is…it’s easy to buy into excuses for your own results. If you want to attract and create more to be positive, happy and grateful about ... your thinking and positive emotional state are the best tools you have to start with. Is it time to upgrade your Rolodex and your experiences? Have you outgrown some of the people you hang out with? Or are the folks to spend time with each day inspiring and encouraging?

In 2010, I am personally passionate about what I am calling Social Partnering™. I’ll be writing a series of articles over the next few months about how to use Social Partnering™ and offering ways for you to use the concept to be more successful this year! I am kicking this off here and there will be more on this month’s Fossland’s Forum (or jump in with one of the two mastermind groups I’ll be personally coaching-see below).

From expansion of your strategic partners to participation with positive people or mastermind groups, I see the opportunity to the average agent to excel and the extraordinary agent to soar this year. With social media tools and Web 2.0, our ability to reach out and use our good relationship social capital to enhance the value we bring clients and customers is expanded in miraculous ways. That doesn’t mean we won’t bring the online offline-in fact, that’s the point! A powerful combination of expanding your previous reach and adding the new is going to bring happiness to those who master the skill. Our relationships then bring value to us! And, I know many of you are very, very good at relationships…so you already are a leg up here!
And, this is really where it all starts. You know that your attitude is so important to your success and who you surround yourself with can make it easier or harder, right. Which do you want this year: easy or hard?

Jack Canfield, the author and motivational speaker, has shared a personal story. He had become very successful, using the principles he learned from Clement Stone and the teachings of Napoleon Hill, author of Think and Grow Rich, (this book is still available free here). He says he had grown his yearly income to $1,000,000 and it was stable and steady there. He set, however, a goal of $10,000,000 but his income stayed stuck at $1M. As he ruminated about why he was stuck, someone asked him what the average income was of those in his mastermind group. This was his “ah ha” moment as he realized they were all making $1M too! Now, not a bad a group that most of us could benefit from hanging out with, but not a fit for his expanded dreams.
Have you expanded your dreams and not matched new partners, friends and supporters to those NEW visions? Or have you given up and become resigned that you can have what you really want because of some outside influences, like the economy or some other personal excuse? There WERE people having their very best year ever last year! Were you in that group? If you, hooray for you! If not, now is the time to decide what you really want in 2010. Old strategies will not get you there. It’s a brave, new world. And one filled with opportunity! How amazingly fortunate we are to be living here in the United States with so many freedoms to create our lives.

Here are some other actions that will help:
Limit your exposure to the media and the “bad” news
Add some daily inspiring messages to your life.
Make a list of your 5 closest friends-do they reflect and support your dreams?
Find one or two new friends to hang out with some more that are inspiring
Buddy with someone who is as inspiring and committed as you want to be and become accountability partners
Form or join a mastermind group and meet regularly to support each other
Begin and end each day counting your blessings!
Put yourself in a place this year where you get the support and encouragement you need to stay focused, aligned and productive.
For 2010, take in less negative input and find the good every day and I promise you it would feel better. It may sound simple, but the best actions usually are. And, it is much easier if the people around you are aligned with the same thinking!