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 I just noticed that US article is a bit out of date – it’s actually from 2006, sorry about that.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?
June 27th, 2008 at 9:26 am
"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 explain better. It appears, on the surface anyways, that longer amortization does increase risk.
June 26th, 2008 at 11:40 pm
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 already had negative growth in the first quarter of 2008.
http://fe70.news.sp1.yahoo.com/s/nm/20080530/wl_c…
5) Summer is finally here
True. Unless by "summer" you mean sunshine and warm weather. It felt a lot like early November out there today.
June 26th, 2008 at 9:52 pm
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 slowly removing that leverage. I see no logic in making payments at all. I think age old RE cliches are nudging both borrowers and lenders towards the traditional terms.
In the big scheme of things, amortizations are almost meaningless. If I bought the median SFH 25 years ago for $165K, I'd have borrowed $125K( 25% down). If I had a 25 year term, the equity would be $770K. If I had interest only, the equity would be $645K. Father Time eventually shrinks the 75% debt to miniscule levels. The present $2000+ monthly rental income dwarfs the $520 monthly interest payment.
June 26th, 2008 at 9:02 pm
"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, whether it be 10, 25, 40, or whatever is best at the time.
"If it wasn’t for them, our market would already have gone illiquid (and rightly so) and prices would have been well on the way to correcting."
If it's any consolation, I think the government is going to leash these guys big time when they start losing money. I think the government is smart enough to see the writing on the wall and I'm pretty sure there are already changes planned. The fact Carney and Flaherty are both coming out sounding warning bells should be a MASSIVE hint things are afoot.
It's also worth noting that every CMHC loan predicates 2-3 other loans that are not CMHC insured. I will be interested to see what sort of credit innovations can withstand life without an unchained CMHC.
June 26th, 2008 at 5:54 pm
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. Again, I point the finger straight at CMHC. They have removed discretion. If it wasn't for them, our market would already have gone illiquid (and rightly so) and prices would have been well on the way to correcting.
June 26th, 2008 at 5:42 pm
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.
June 26th, 2008 at 5:20 pm
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 is CMHC putting tax payers on the hook. If you are going to lend to people with crappy FICO scores they MUST put down a sizeable downpayment.
Again, I find it interesting that in the states, the government backed Fannie Mae lends conservatively and the private sector provides risky subprime loans, but in Canada the private sector provides high downpayment loans and the government backed entity takes on the super risky stuff (Yes I know that Genworth is an exception. Why they want to commit harikari in Canada beats me).
June 26th, 2008 at 5:04 pm
"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.
June 26th, 2008 at 5:00 pm
"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 risk spread, the latter…
June 26th, 2008 at 4:38 pm
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.
June 26th, 2008 at 3:22 pm
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.
June 26th, 2008 at 3:10 pm
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.
June 26th, 2008 at 3:08 pm
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?
June 26th, 2008 at 3:01 pm
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.
June 26th, 2008 at 2:54 pm
The last post was mine.
June 26th, 2008 at 2:53 pm
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.
June 26th, 2008 at 12:36 pm
Freako,
The discount rate is never the same as the lending rate. The lending rate is always the discount rate plus a risk premium…?
June 26th, 2008 at 11:39 am
"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?
June 26th, 2008 at 10:38 am
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.
June 26th, 2008 at 10:27 am
"'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.
June 26th, 2008 at 9:30 am
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 years hence.
June 26th, 2008 at 9:06 am
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 our motive to be here is to serve bulls or bears.when Matt is giving you edge he also serving the purpose to ignore the bull case did he miss dave as bull that time? it is very clear in all thread bulls post or bears- if we are not hereon our own it is very difficult to see our part of representation.Only together we can make a difference but then bears won't be able to buy on high and bulls won't be selling cheap
after four year long debate what bears got on the board? a strong market with 20k mls to bank on- as previously claimed by bears for crash, percentage of crash also changed by majority of bears from 60% in 2005 to 5-10% in 2008.how is this possible? if market suppose to crash around 2005 by 50-60% why it is only 5-10% in 2008?.
at the end bulls or bears both need to stay here to
represent our own part.
June 26th, 2008 at 9:01 am
"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.
June 26th, 2008 at 7:55 am
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.
June 26th, 2008 at 6:27 am
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!
June 26th, 2008 at 6:24 am
http://vancouver.en.craigslist.ca/rfs/731833749.h…
$500 per ticket for draw for luxury brand new 10th floor corner condo, 1035 sf. Valued @ $450k. Only 840 tickets to be sold.
My first reaction? 500*840=420K… So, isn't it valued at 420K then??
What happens if not all the tickets are sold? Do you get your money back?
Smells like a scam to me. Heck, what a great way to make money! You could be a "private investor" looking to unload. Pick some random location with a open house and start selling lottery tickets to it. And you can keep going if you keep it cheap — nobody would bother going to the cops if it's just a few hundred bucks out the window…
Hmmmm….. nah, too easy!
June 26th, 2008 at 6:24 am
"…it is also worthy asking if improved affordability due to longer amortizations will lead to permanently higher prices."
The Japanese tried 60-year mortgages in the 1990's. Prices did not increase or plateau, but in fact continued to decline after the longer amortizations were introduced.
June 26th, 2008 at 6:19 am
freako: thumbs way up on that, especially the last two paragraphs.
June 26th, 2008 at 5:58 am
In fact, it we discount by the rate of borrowing it (40 year amort) doesn’t cost a penny more.
Correct. From a fundamental standpoint, amortization doesn’t matter. It could be interest-only for that matter.
I agree about some of the consequences of the 40 year term, but quote that suggested that a 40 year term is MORE EXPENSIVE is plain wrong, and such misconceptions irk me. People should be reluctant to use 40 year mortgage for the right reasons (impact on equity cushion), not the wrong ones (more interest paid). Don't these reporters/experts know better? This is up there with the mutual fund sales people who tell you that $1,000 invested when you are 10 years olf will be worth a gazillion dollars when you retire.
Honestly, I don't have a beef with 40 year mortgages in general, only the externalities related to impact on home prices. As a buyer, the equity cushion is not a big deal. I actually face less chance of foreclosure because for the same property, one financed with a 40 will have lower payments. Barring unprecedented price declines (as are about to happen) it will be rare to see negative equity. And if it happens, the owner is fine as long as he makes his payments. Finally, with a 40, you have the option of shortening the term by simply making the 10% (or whatever) overpayment that you are typically allowed to make.
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.
Personally, I think they should leave the 40 alone, but force CMHC to increase required downpayment whenever price/rent multiples in a given area goes out of whack. That would keep a check on bubbles like nothing else.
June 26th, 2008 at 5:23 am
That condo raffle…I'm surprised the ad didn't mention "one block from the Paramount strip club!" Not exactly the kind of area I'd pay $450K to live.
Also, I could comment on the "20 minutes drive to downtown Vancouver" part, but maybe I'm just not an aggressive enough driver.
June 26th, 2008 at 3:03 am
surferbob,
I doubt its a scam, but I'd also be surprised if they bothered to get a license (or whatever they need legally).
This is a Hail Mary Play. The flipper financially can't do what's needed: to reduce the price twenty thousand dollars a weeks until its sold.
"Valued @ $450k." No, the market has spoken.
When this fails…bankruptcy.
June 26th, 2008 at 2:21 am
Wouldn’t it have made more sense to introduce a 40yr amortization immediately after a correction once interest rates started rising? When did it first appear?
Don't confuse term with amortization. Term is the length of time the interest rate is fixed. Very few mortgages have more than a 5 year term because there is a substantial interest premium for going beyond that.
Amortization is the length of time it takes to pay off the principal.
That said, you are still correct in part. The reason is that long amorts pay off the principal very slowly. This greatly increases default risk in a stagnant or falling market. However our good friends at CMHC assume the risk from the banks so they don't have to worry about this.
My own opinion is that CMHC should not insure any amort beyond 30 years or LTV beyond 90%, nor should any institution backed up by deposit insurance be allowed to issue them. If the non-banking private sector (i.e. not backed up by CDIC or CUDIC) wants to issue or insure such mortgages, they can go right ahead. Anyone can make a mortgage loan.
June 26th, 2008 at 1:11 am
hey …the condo raffle is kinda cool wonder if they have to get a licence to do that? seems like it could be an easy scam.
June 26th, 2008 at 12:16 am
I'm constantly amazed at how our bubble is an exact copy of the US, two years later:
Raffle for a New West condo, $500/ticket:
http://vancouver.en.craigslist.ca/rfs/731833749.h…
This must be Quantum by Bosa. Yet another flipper graveyard.
June 25th, 2008 at 11:07 pm
Wouldn't it have made more sense to introduce a 40yr amortization immediately after a correction once interest rates started rising? When did it first appear?
June 25th, 2008 at 10:55 pm
"I just glanced through the RBC Annual report from 2007 and couldn’t see anything. Any ideas?"
They are not required to disclose at that level of detail.
June 25th, 2008 at 10:27 pm
Regarding the prevalence of 40 year mortgages, I'm a little surprised there aren't harder statistics to talk about yet. All the major banks are publicly traded, so I would have figured there would be some breakdown of their mortgage portfolios by amortization in their quarterly/annual reports. I just glanced through the RBC Annual report from 2007 and couldn't see anything. Any ideas?