Thanks to Condohype for sending in the link to this story in todays Vancouver Sun: mortgages move into uncharted waters. This is a similar article to the one linked to last week about over-stretched buyers fueling the real estate boom, but refers to a Scotiabank report released yesterday focusing on the risks created by relatively new 40 year mortgage terms. According to the report, longer term mortgages now account for a full two-thirds of all mortgage applications.
In the near term, their introduction — which began in 2006 when Ottawa “unshackled” the Canada Mortgage and Housing Corporation from the traditional 25-year mortgage — will help stabilize a softening Canadian housing market as it draws in a new group of buyers.
Longer term, however, nobody knows what the effect will be, Holt said.
If, for instance, buyers as a group tend to pay back the debt at an accelerated pace, it will increase the risk for the originators of the mortgages and buyers of mortgage-backed securities into which they are folded.
On the other hand, the report says, “future shock risk is being intensified,” in the event that a large portion of new buyers move into such leveraged products and suddenly face a shock to interest rates or wage growth.
Now, if faced with sudden difficulties, the holder of a 25-year mortgage can move into a 40-year, but it’s unclear what would happen if the 40 becomes the norm and economic difficulties arise.
I’m not sure why it’s so ‘unclear’ what would happen if the majority of buyers have no adjustment room in their mortgages, pay a majority of their income to cover loan interest and ‘economic difficulties’ arise. I don’t need a crystal ball to foresee that such a situation would be ‘problematic’. Unfortunately as we’ve seen in the USA, ‘economic difficulties’ can simply be a drop-off of buyers at over-inflated prices. Prices in the US started dropping long before problems with sub-prime mortgages and recession fears started looming.
I also find it strange that all these new products were introduced in the midst of a boom rather than when the housing market needed ‘saving’ from a collapse. Seems a bit like using up your nitrous on the drive to the racetrack. This article also touches on the way these new mortgage products encourage speculation:
Equally significant is the impact changes to the mortgage industry may have on the condo market, Holt said.
Starting last year, Ottawa changed the rules on insured-investor mortgages, allowing buyers to acquire an insured mortgage on a property other than a principal residence.
Holt said he estimates one in four condo buyers is a speculator looking to profit from property price gains and, he forecasts, “This is going to intensify influences of investor sentiment, particularly the condo market over the next few years.
“You’ll see more speculative activity in the market at a time when there’s already a fair amount.”
This can sharpen market downturns, as appears to be the case in Calgary, when prices drop and speculators rush to unload properties.