Soft landing seen for housing market

The Bank of Canada is predicting a ‘soft landing’ for the Canadian housing market as the national real estate boom cools. The central banks deputy governor Sheryl Kennedy gave a speech yesterday in Banf Alberta where she referred to the cooling trend in the Canadian real estate market as both ‘expected and welcome’.

As one of the country’s largest housing booms loses steam, most economists are forecasting a small increase in prices this year that will keep pace with the central bank’s 2-per-cent target for inflation.

In similar news Federal Reserve Chairman Ben Bernanke is predicting a soft landing for the US market as well:

“Our assessment at this point … is that this looks to be a very orderly and moderate kind of cooling,” Bernanke said.

Though it is a minor concern, both the Bank of Canada and the Fed see potential problems when it comes to new mortgage products:

Despite her fairly positive outlook, Ms. Kennedy cautioned that Canada can’t afford to become complacent about the real estate market, noting it took a decade for prices and sales to rebound after the bust of the late 1980s.

To that end, the central bank is keeping an eye on “challenges,” including ensuring that mortgage innovations, including 40-year amortization products and “near-prime” mortgages, don’t detract from prudent lending practices.

While Bernanke had this to say on the topic:

On the issue of risky home mortgages, Bernanke pointed out that the Fed has issued some guidance for lenders and he underscored the importance of borrowers making sure they understand how interest-only and other non-traditional mortgages work.

“We’re not saying you shouldn’t make these loans. What we’re saying is that they be done the right way,” Bernanke told the banking conference.

Wait a minute.. I just noticed that US article is a bit out of date – it’s actually from 2006, sorry about that. Here’s a more recent article on the US market:

Home prices in 20 U.S. metropolitan areas fell in April by the most on record, signaling the housing recession is far from over, a private survey showed today.

The Case-Shiller home-price index dropped 15.3 percent from a year earlier, less than forecast, after a 14.3 percent decline in March. The gauge has fallen every month since January 2007. The group began keeping year-over-year records in 2001.

Mortgage defaults and foreclosures are adding to the glut of properties on the market, while stricter loan rules are making it more difficult for prospective buyers to get financing. The prolonged real-estate slump, along with higher fuel prices and a shrinking job market, is taking a toll on consumers and the economy.

Thank goodness it’s different here eh?

137 Comments
newest
oldest most voted
Inline Feedbacks
View all comments
jesse
jesse
12 years ago

"I think age old RE cliches are nudging both borrowers and lenders towards the traditional terms." Perhaps though there's enough competition out there, not just from big traditional lenders, that IO should be way more prevalent than it currently is. HELOCs are common to be interest only so it appears there is provision for the investor out there. Interest only products in the form of HELOCs do exist but for whatever reason IO hasn't been able to push into the primary mortgage market. Is it a legal requirement that primaries have amortization? BTW I found True North Mortgage's reference to Genworth's insurance premiums and they increase with longer amortizations. Whether this is because longer ams is a relatively new concept so carry more uncertainty or there is indeed additional risk with longer ams. I'm sure an actuary at Genworth could… Read more »

Deliverator
Deliverator
12 years ago

James: I’m not convinced at all. Dressing up some bear shit and calling it facts is hardly proof of impending real estate decline. Facts. Cited. Now go call the papers and tell them they're dressing up "bear shit" as "facts". 1) Canada’s housing market continues it’s apreciation. There is not a market in Canada which has had a median price decline. Prices are still affordable and demand continues to remain stable. Supply has increased but sales volume remains steady. Calgary median price declines: http://www.canada.com/calgaryherald/news/calgaryb… 2) Interest rates are stable Fairly so, yes, but on average rising since 2006. And really, they have very little room to move down. http://www.mississauga4sale.com/rates.jpg 3) Unemployment is at record lows True, but it appears to have bottomed out, much like mortgage rates. http://www.statcan.ca/english/Subjects/Labour/LFS… 4) There is no possibility of a recession now Maybe, but Canada… Read more »

freako
freako
12 years ago

Does the bank want to see amortization to reduce its risk or could it care less? If I was the bank, I would care less as long as received a sufficient downpayment and was reasonably assured that the borrower could make interest payments. I mean, do you really think banks want you to pay off your credit cards. Based on your logic a well-disciplined borrower would want longer ams and pay back principal as they deem appropriate, whether it be 10, 25, 40, or whatever is best at the time. If I was an investor, I'd want interst only. What is my incentive to pay down the debt if I have an revenue generating asset. I would just use the cash flows to fund other investments. I mean, what is the point of using leverage to my advantage, and then… Read more »

jesse
jesse
12 years ago

"How relevant is that? Second, with the 40 they have more money to spend on other things, and perhaps they won’t need refi. Or even better, perhaps they invest and receive a good return" I am sure many save to give themselves equity, not necessarily in their properties. The problem I'm trying to resolve is if amortizations are a requirement by the bank or a requirement by the borrower. Does the bank want to see amortization to reduce its risk or could it care less? Again, this goes back to why we haven't seen multi-generational, option am, or 0 am stuff prevalent yet. I can't figure out why, other than banks are loth to offer them or borrowers don't want them. Based on your logic a well-disciplined borrower would want longer ams and pay back principal as they deem appropriate,… Read more »

freako
freako
12 years ago

Thats not how im seeing it play out. case 1 they small house and pay X per month with 20 year ams case 2 they get bigger house and pay exactly the same X with a 40 year ams. Perhaps now they do, but long long ago there existed a time when people didn't buy the most home possible using the largest mortage they qualify for. One day those days will return. People have no disicple. Most people i know maxed out the house they buy and use any mortgage trick to make the monthly payment. Well some do and some don't. As long as the bag holder (lender) is playing with his/her own money, I don't understand why we limitindividual choice based on the follies of others. If lenders are rational they will decide who qualify for which loan.… Read more »

Ian
Ian
12 years ago

Why would you say they have more money to spend?

Thats not how im seeing it play out.

case 1 they small house and pay X per month with 20 year ams

case 2 they get bigger house and pay exactly the same X with a 40 year ams.

People have no disicple. Most people i know maxed out the house they buy and use any mortgage trick to make the monthly payment.

freako
freako
12 years ago

The other consideration is that subsequent home equity refis are more difficult with 40 year ams for much longer. How relevant is that? Second, with the 40 they have more money to spend on other things, and perhaps they won't need refi. Or even better, perhaps they invest and receive a good return. The essence of longer am periods are fine by themselves but require more borrower discipline to be a wash with the traditional mortgages. Fine for many of us but that is not how I am seeing these products being used. IMHO opinion, if we have rational lenders, not rational borrowers. I think the main problem has been that the mortgage originators/insurers are playing with other people's money. In the case of subprime it was the packaging and reselling of crappy mortages to unwitting investors. In Canada it… Read more »

jesse
jesse
12 years ago

"Again I reiterate that “skin in the game” (downpayment) is what banks should be demanding."

Yes but some in financial difficulty will use this cushion up with second liens.

jesse
jesse
12 years ago

"All else the same a 40 year term has lower payments, thus lower chance of default." The other consideration is that subsequent home equity refis are more difficult with 40 year ams for much longer. The hazard is a long enough amortization, if used only to improve affordability by allowing a larger principal, will lead to a longer period of no equity cushion if markets flatline or fall. The essence of longer am periods are fine by themselves but require more borrower discipline to be a wash with the traditional mortgages. Fine for many of us but that is not how I am seeing these products being used. These days lenders either take on faith that everyone taking a longer am has this required discipline or they somehow think the longer ams justify higher prices. The former requires a higher… Read more »

freako
freako
12 years ago

All else the same being the important part – I’d argue that what remains the same after the introduction of 40 year mortgages is the monthly payment,

Perhaps in the aggregate. But for an individual contemplating which mortgage to go with for a given purchase, that is not the case. The default risk is definitely lower for the 40 in that case. The consequences of default will be slighlty higher, however.

Again I reiterate that "skin in the game" (downpayment) is what banks should be demanding.

Lager not Logger
Lager not Logger
12 years ago

All else the same a 40 year term has lower payments

All else the same being the important part – I'd argue that what remains the same after the introduction of 40 year mortgages is the monthly payment, NOT the price of the house or condo – that makes people more vulnerable to downturn if the market is driven by speculation instead of fundamentals.

freako
freako
12 years ago

What? You’ll (almost) guarantee that prices will be equal or higher than today’s in 10 years? Is that what you’re trying to say in your convoluted way?

More specifically, no. You forget about the downpayment.

freako
freako
12 years ago

Not true, if a mortgagee defaults the bank is stuck for more on the longer term loan. Less of the principal will have been paid.

Is it really that hard.

All else the same a 40 year term has lower payments, thus lower chance of default.

The amount of principal paid back for a 40 year loan is in the first five years is negligible.

Is that what you’re trying to say in your convoluted way?

What's your problem?

freako
freako
12 years ago

The discount rate is never the same as the lending rate. The lending rate is always the discount rate plus a risk premium…?

By discount rate I meant whatever rate you choose to discount future cash flows for risk and loss of purchasing power. I did not mean the interest rate charged to banks for borrowing short-term funds directly from the Federal Reserve.

freako
freako
12 years ago

The last post was mine.

Anonymous
Anonymous
12 years ago

I’m surprised, then, that banks do not offer zero amortizations more regularly; lenders should be all over this product if it improves affordability.

Dunno, but skin in the game in the form of downpayment is much more important in terms of reducing risk. Think about it. The greatest risk is in the first few years. How much does 25 year mortgage amortize in the first 5 or so years?

As for improving affordability, the difference between 25 year and IO really isn't that much.

watching the market
watching the market
12 years ago

Freako,

The discount rate is never the same as the lending rate. The lending rate is always the discount rate plus a risk premium…?

Drachen
Drachen
12 years ago

"If 40 year (or 100) am mortgages are a permanent fixture it means more risk for lenders.

Only in the sense that they impact prices (which they ought not to in theory)."

Not true, if a mortgagee defaults the bank is stuck for more on the longer term loan. Less of the principal will have been paid.

"I can almost guarantee you that even an interest only won’t be under water 10 years hence."

What? You'll (almost) guarantee that prices will be equal or higher than today's in 10 years? Is that what you're trying to say in your convoluted way?

patriotz
patriotz
12 years ago

Prices did not increase or plateau, but in fact continued to decline after the longer amortizations were introduced.

Because they borrow demand from the future, as I have pointed out.

Also the US has interest-only (infinite amort) and neg-am (beyond infinite) and we all know how well they are supporting higher prices.

jesse
jesse
12 years ago

"'If 40 year (or 100) am mortgages are a permanent fixture it means more risk for lenders.'

Only in the sense that they impact prices (which they ought not to in theory)."

I'm surprised, then, that banks do not offer zero amortizations more regularly; lenders should be all over this product if it improves affordability.

"The equity cushion? If a crash happens soon, what difference does it make? The extra amortization of a 25 year is marginal"

After 10 years, principal payoff is 8% for 40 year versus 25% for 25 year.

Anonymous
Anonymous
12 years ago

If 40 year (or 100) am mortgages are a permanent fixture it means more risk for lenders. Only in the sense that they impact prices (which they ought not to in theory). How will they handle longer amortizations when default rates go higher on these products than others? Right now I don’t see much rate spread between 25 and 40. There is no reason why the 40 would have a higher default risk than a 25. As I have mentioned, it is lower in that payments are lower for an identical property. The equity cushion? If a crash happens soon, what difference does it make? The extra amortization of a 25 year is marginal. If a crash happens much later, what difference does it make? I can almost guarantee you that even an interest only won't be under water 10… Read more »

Thums up2
Thums up2
12 years ago

Van Zee, Are you bhanji,vancouver ji or vancouver zee cinema anyway 40 year term is a brand new product if you say it was available in store since 2005 but it was sitting on shelves because affordability was not eroded than comment #61 actually says it was first year when people start using that you can add when most people start using it. "Low or no down payments were popular with first-time buyers in 38 per cent of markets. “ Vanzee what do you mean?Are you throwing this number to say thanks or you giving me rant.I say 37% and you found 38% but you are also applying them on first time buyer but i didn't say first time buyers so it's difficult for me to grasp your thanks or rant. Freako, You are good as already said neutral still… Read more »

jesse
jesse
12 years ago

"The problem with the 40 is when homeowners use it to buy a more expensive property then they would with the 25 year. Even that is not necessarily an issue. The problem is when homeowners in the aggregate push up prices so that what would have been affordable on a 25 year mortgage now requires a 40 year."

Again it begs the question of how affordability relates to house prices. Since the asset value does not fundamentally change by extending amortization it must mean a greater fallout to bring prices back down to fundamental value. If 40 year (or 100) am mortgages are a permanent fixture it means more risk for lenders. How will they handle longer amortizations when default rates go higher on these products than others? Right now I don't see much rate spread between 25 and 40.

van-zee
van-zee
12 years ago

On the subject of being two years out of sync with the US and 40 year term.

Thums mentioned that the 40 year term was only introduced in canada in 2007.

So my question is when did they start in the US?

This is what I found.

"After test marketing a 40 year mortgage for some months, Fannie Mae announced last week that it will begin purchasing them. The Corporation acknowledged that changes in "housing market affordability and requests from (our) lender partners" led to the decision to extend the maximum loan term on certain loan products."

published date 6/9/2005 http://tinyurl.com/5p6fre

I found this from the CMHC 2006 anual report.

"In 2006, we helped make homeownership more affordable, by providing mortgage insurance on 100-per-cent financing, and by extending repayment periods to up to 40 years."

Not quite 2 years.

Vansanity
Vansanity
12 years ago

Nice post Patiently Waiting! Condo raffle… is it a pre-completion I wonder? You're right too, they say it's valued at $450,000 but they're selling 840 tickets at $500 which equals $420,000. So, even by taking this desperate measure, they're still willing to sell it below "market value". Riiiiiiiight… nothing to see here, just another sign that we're back to a balanced market, that's all. No big D!