U.S. and Canadian Mortgage Comparison Key to Market Differences
Readers who are doing a mortgage comparison and are interested in why the Canadian mortgage and housing markets continue to hum along, albeit with house sales and housing price increases at a much more moderate pace than last year’s record setting level, need look no further than a recent letter to the editor of the Ottawa Citizen submitted by Nancy Hughes Anthony, president and CEO of the Canadian Bankers Association, for a summary of differences between the two markets.
Why, many ask, is the Canadian mortgages and housing market relatively healthy compared to the ongoing mess in markets south-of-the-border? Look no further than the types of home mortgages written by banks in Canada, and who ends up holding the mortgage.
Ms. Anthony clearly makes the point that “non-prime loans”, particularly the now-infamous “sub-prime mortgage” loans make up a much smaller percentage of Canadian home loans than they do in the U.S. And, moreover, Canadian banks tend to keep Canadian home mortgages on their own balance sheets, rather than bundling them up (i.e., “securitizing” them) and selling them off to third party investors. When those investors took a good look at the quality of the home mortgages being written by U.S. banks and then sold off as well-rated securities, the market for sub-prime and other asset-backed commercial paper essentially dried up, sparking a tightening of credit markets around the globe.
“In fact, Canada doesn’t have the same problems with sub-prime mortgages that we have been seeing in the United States,” Ms. Anthony writes. “Generally, non-prime mortgages constitute a wide-ranging category of loans, from those that aren’t much different from prime loans to those that are significantly riskier, such as sub-prime loans. Significantly, she notes, “Non-prime loans make up less than five per cent of all outstanding mortgages in Canada compared to about 20 per cent in the United States.”
Ms. Anthony also points out that Canadian banks securitize a much smaller proportion of the mortgages they write, holding the remaining loans on their books where they accounted for in each of the banks’ bottom line. “Only about 20 per cent of outstanding mortgages in Canada are securitized,” she observes, “while American lenders rely much more heavily on securitization. In other words, Canadian lenders tend to originate and hold mortgages, while in the United, the model was on an ‘originate to distribute’ model.”
The end result? Ms. Anthony notes that the percentage of mortgages Canada that are in arrears is close to an historic low – 0.26 per cent in April, five times lower than a U.S. arrears rate that is climbing, and where foreclosures sales are now commonplace in many regional markets.
What Ms. Anthony fails to note is the large exposure to the U.S housing woes that some Canadian banks and financial institutions incurred due to their overlax lending practices in their U.S. operations . While the Canadian mortgage lending practices of banks like the CIBC may have been conservative, in alignment with Canada’s much more fiscally conservative and prudent regulatory framework, the U.S. lending operations of Canadian banks operating in the United States were not necessarily so. When Canadians making a mortgage comparison look at the differing rates between Canadian lenders, they may find that some of the write downs that Canadian institutions are being forced to take as a result of losses incurred in the U.S. market may be reflected in the rates and terms that are being offered here in Canada.
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It just seems to me that the Canadian mortgage market is healthier than the U.S. , because we are more careful. but But I can not imagine, how would it look if we didn`t have the U.S. market to show us the error. It is quite sad to see that the “powerful” U.S. economy serves as a warning for others, what to avoid. Though I`m still happy that it`s not our market that is this way.As a realtor in Toronto I come in close contact with mortgages, often advising my less experienced clients where to go and what to do. So I welcome articles like this, that help me not just get the numbers right, but also the info I use to explain why is something the way it is.
Cheers
Julie
I’m not sure our market is immune to everything that’s happening south of the border. The 0 down 40yr mortgage was the Canadian version of a sub-prime mortgage.
I’ve just recently found a house I love up here – I want to put an offer in on it, but I’m petrified I’ll loose my shirt by this time next year. If our market drops 15% (as many are speculating it will), I’ll be up the creek!
We’ve seen markets decline around the world. Britain has seen a 50% drop in housing values. Of course RE agents paint a bright picture – its in their interest to do so. Nobody has a crystal ball, but there certainly is a hum of negativity and listings galore on the street these days.
I agree with CF in Barrie. European real estate is starting to get hit now. It only seems like a matter of time before the momentum overtakes us. I can’t believe we are that isolated that we will wake away from this with a slow down in sales volume as opposed to price decreases. My guess is that it will hit us in October/November.
I agree that our market is not “immune to everything” that is happening in the U.S. mortgage and housing markets – but, in my view, that should not be construed as meaning that we are inevitably in store for a drop in the housing market like that we are witnessing in the U.S., and increasingly in Great Britain and parts of Europe.
London’s Financial Times ran an insightful analysis of how Canada’s mortgage lending industry differs significantly from that in the U.S. and U.K., which I partially summarized in an earlier blog entry “Mortgage Comparison Critical as Lender Pool Shrinks.” It provides a concise summary of the key difference in Canadian mortgage lending practices that have, so far, protected our housing market from the turbulence and drop in other markets.
The federal government’s recent moves to tighten mortgage rules, effectively eliminating zero-down, 40 year amortized mortgages as of October 1st is not aimed at the elimination of mortgage products that are akin to the sub-prime mortgages in the States, but rather a tightening of the qualifications Canadians will need to get into the housing market. It was not solely the sub-prime mortgages that crippled the U.S. housing market (although they were a precipitating factor), but rather a whole host of mortgages written without proof of the borrowers’ ability to repay the underlying loan. Together with interest-only mortgages and mortgages that had low introductory rates that subsequently spiralled, sub-prime mortgages created a demand for housing that was unsustainable and not market driven.
We are seeing corrections in the Canadian housing market, for sure. Appreciation in house prices are way down, listings are way up and new housing starts are concentrated in multiple-family dwellings not single detached homes. The best analysts seem to expect the current flat market to continue into 2009, as new household formation dries up the oversupply of houses on the market. But except for particularly overheated markets in Alberta (and, perhaps, Saskatchewan), where there has been a very modest drop in the price for single detached homes, the numbers do not seem to support a large scale drop in housing prices like that seen in the U.S.
But, of course, nobody wants to get into the market when there are fears that housing prices will drop. That accounts, in part, for the glut of listings on most MLS boards. The counter risk is that one stays out of the market too long and sees prices appreciate (albeit at a much more sustainable rate) while one stays on the sidelines. Nonetheless, it is a buyer’s market (in all but the most desirable areas of our large markets, like Toronto). Contrarian investors would say that this is the time to find a motivated seller, when the market is flat. But be cautious. While real estate has always gone up in the long-term historically, a home is usually one’s biggest investment. Those who speculate on homes, often get burned . . . either by jumping into an overheated market, or staying out of a cooled pond.
Thanks for following the blog. I can appreciate the sentiment. Public sentiment swayed by the barrage of bad news from the U.S., and increasingly the U.K. makes it difficult, at times, to look at the underlying fundamentals of our market. Why should Canada’s housing market be any different than that south of the border or across the pond? I would refer you to the Financial Times article “Canadian mortgages stay ‘boring but beautiful’” that is linked to in my earlier blog entry “Mortgage Comparison Critical as Lender Pool Shrinks”. It provides an insightful analysis of how and why Canada’s mortgage rules have immunized us, to date, from the housing havoc that has erupted in the U.S. and now, apparently, Great Britain.