Canadian mortgage market fundamentals remain strong

The federal government’s decision to purchase $25 billion of mortgages from the Canadian banks is being viewed as a precautionary, rather than necessary move, to put liquidity in the mortgage markets. Experts maintain, while the housing market is slowing down, it doesn’t resemble anything like the U.S. crisis.

The federal Department of Finance emphasized that its decision to take over high-quality CMHC-guaranteed mortgages had nothing to do with the risk profile of the mortgages in Canada, but was rather a way to infuse more liquidity into the Canadian market because banks are hesitant to lend to consumers.

Granted, the purchase is a drop in the bucket, given that Canada will have more than $913 billion of outstanding mortgage debt in 2008, according to a recent report from the Canadian Association of Accredited Mortgage Professionals (CAAMP).

One of the key indicators of the strength of Canada’s mortgage market is Canadian homeowners generally have much more equity in their home than their U.S. counterparts. The Department of Finance points out that in Canada, the average homeowner’s mortgage debt relative to the value of housing is slightly over 30% versus in the U.S., where homeowners on average are carrying 55% of the home’s value in debt.

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Granted, a decline in home prices can drastically affect that statistic, but for now, it points toward Canadians having the capacity to pay back their mortgages. The risk is in our banks not having the liquidity to lend for future mortgages, points out Jim Murphy, president and CEO of the CAAMP.

“I’m asked a lot about [banks no longer offering mortgages]. If you qualify and you’ve got a reasonable credit score, the answer is no. From our membership I’ve not been told about any situations where people can’t get mortgages,” he says. “There is an issue with the banks wanting to get liquidity to fund mortgages. There is a concern with the credit markets and perhaps a freezing of inter-bank borrowing. In terms of the availability of mortgages, there haven’t been any significant issues.”

Murphy says the only significant pullback in lending is for alternative lending solutions. He says some of these providers have left the country, but these types of mortgages represented a very tiny percentage of Canadian home lending.

A new economic report from CAAMP, compiled by the organization’s chief economist Will Dunning, says only 0.27% of residential mortgages offered by the seven largest banks were in arrears as of June 2008. That represents only about 10,300 out of 3.85 million mortgages.

The Bank of Canada estimates that about 2% of subprime mortgages in Canada may be in arrears or foreclosure. In total, CAAMP estimates about 20,000 to 25,000 Canadian homeowners out of 8.05 million might be in arrears.

Pascal Gauthier, an economist and analyst in Canadian real estate for TD Economics, says the only real impact the credit crisis has had on the home market is marginalizing those who would have only been able to purchase a home using a subprime or alternative lending. The consumers who generally have much higher credit risk are likely to be out of the market. This has an impact on home prices, because it decreases the number of buyers in the market.

This is not an ideal situation for homeowners hoping for an increase in their valuation, but it creates a neutral buyer’s market. For most Canadian homebuyers there shouldn’t be too much fallout from the credit crisis, because falling home prices will likely offset any increase in mortgage rates that could result from tightening in inter-bank lending.

“It’s difficult to think rates are going down. For affordability, that’s going to be offset by the drop in resale home prices,” Gauthier says. “The resale home market is softening — mostly out west — after running at a furious pace over the past few years.”

Even if rates were to drift slightly upward, Murphy points out that rates remain at historical lows.

“In historical terms, we are nowhere near the 1970s and 1980s. Today if you qualify and can some of the discounts out there, you can still get a fixed five-year mortgage under 6%. In historical terms that is very low,” he says.

The credit environment may force more homebuyers to look at debt-consolidation products, like a home equity line of credit, rather than traditional mortgages.

In November, CAAMP will have statistics for this last year to see if there’s been a pick-up in this type of product usage. Murphy says these types of financing represented 17% of home debt financing in their 2007, and homeowners tend to use them as a way to either consolidate debt or finance a new home renovation.

One of the more recognized of these products in Canada is Manulife One, which brings a person’s mortgage, savings and income together into one multi-purpose borrowing and chequing account.

Any savings and income reduce the amount the client needs to borrow, which saves interest costs. When income enters the account, it immediately pays down the debt and then clients draw on the account to pay for expenses. Interest is calculated on a daily basis as long as there is money in the account; there is less debt and therefore less interest.

Jane Strong, assistant vice-president, product and marketing services for Manulife Bank, says she sees these types of products as particularly appealing during periods of rate uncertainty.

“Most Canadians manage their finances by depositing their income and other short-term assets into chequing and savings accounts and then borrowing when they need to, through mortgages, lines of credit, personal loans and credit cards. Unfortunately, they usually receive low interest on the money they deposit, while they pay high interest on the money they borrow,” she says. “In today’s times, people should be looking to solutions to better manage their debt and cash flow, and Manulife One can help. It can simplify consumer finances, reduce interest costs and allow clients to be debt-free sooner.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(10/10/08)

Mark Noble