What's Up with the Canadian Market Eh?

Question

Canada's been in trouble it seems with Buffett buying out their distressed mortgage holder, Home Capital Group.

https://www.nytimes.com/2017/06/22/business/dealbo...

But now there's some cracks that look like the country is in for a bigger reckoning...

http://www.zerohedge.com/news/2017-07-17/canadian-...

Roy N. · Answer

@Justin B.

Canadian residential mortgages are most commonly with 25yr amortization.  Even if you have a 30yr amortization, you would need to qualify using a 25yr amortization.

Mortgage terms in Canada vary from 6-months to 10-years with 5-years (then 3-years) being the most common.   While it is technically true a borrower must re-qualify at the maturity of term, in most instances if the borrower has an clean payment history and is not way offside on the value of the property, the lender will offer to extend financing for a subsequent term.

Refinancing (aka renewing) a mortgage at a higher rate - or in recent years, a lower rate - is just a fact of life here in Canada.

Roy N. · Answer

@Justin B.

Ironically, Home Capital Group is not that big of a Canadian mortgage holder.  However, they specialize in financing borrowers who cannot place a mortgage with a Schedule A / Tier-1 lender.

Even then, the regulatory requirements to qualify for mortgage financing in Canada - even before they were recently re-tightened - is stricter than in the U.S.A. ... which is why Canadians have historically had mortgage arrears <1% and defaults <0.5%.   That said, we are just coming out of a period (almost a decade) of the most relaxed mortgage lending in our history, so those historic rates will probable slip a little.

None-the-less, at its rather discounted price, Home Capital Group, is likely a lower risk investment in contrast to sub-prime lenders in the U.S.A.  Undoubtedly, Buffet's conclusion must be similar.

Lending practices aside, the biggest risk - as your graph and Thomas's post illustrate - is the generation of rising real estate prices (heavily fuelled by select markets within Canada) with no substantial re-alignment to underlaying local economics and household incomes.   At some point a significant amount of "paper wealth" may return the the ether leaving a lot of folks drowning.   With our shorter mortgage terms, borrowers will not be able to hold the wolf at bay for 25 years while they payoff a note bigger than the value of their house.

Thomas S. · Answer

Yep, we seriously need a major adjustment and the shoe is going to drop. 2008 did not have a direct impact on the Canadian markets and as a result the necessary adjustment did not occur.

The adjustment will probably not help investors much as the majority of good pickings will come from over extended SFH and condo owners. Not a worthwhile market for income property investors.

Account Closed · Answer

I heard on the radio few weeks ago Canada is in the same bubble we were back in 08, they said regular folks are buying a million dollar houses and yet their income is like 40 or 50k

Account Closed · Answer

@Roy N. Right. Isn't that half the economic power of Canada tho'?

"Nothing to see here, move along" ;-)

Account Closed · Answer

Don't shoot the messenger.

Canadian Home Sales Crash In June

The Canadian Real Estate Association says home sales in June posted their largest monthly drop since 2010, with the Greater Toronto market leading the decline.

This is the third monthly decline in a row...

http://www.zerohedge.com/news/2017-07-17/canadian-home-sales-crash-june

Roy N. · Answer

@Justin B., Account Closed

Much of those eye catching headlines are driven by a few specific, though populous, areas of the country (Vancouver, GTA and Horseshoe).  Price changes and sales down East have been largely muted in comparison and not  as terribly out of alignment with economics.

Justin B. · Answer

Crazy stats coming out of Goldman Sachs.

Here's something I didn't know about Canadian mortgages, people have to requalify every 5 years:

"nominal home prices in Canada have grown by 13% over the past year, and by 200% since 2000. These sharp increases in home prices in Canada have invited comparisons with the US housing market in the period leading up to the Global Financial Crisis (Exhibit 1). A large downturn in the Canadian housing market in 2017 would seem particularly untimely given the likelihood of rising mortgage rates in Canada. Most Canadian mortgages have 25-year amortization schedules but 5-year terms, and so borrowers typically have to re-qualify for new mortgages every 5 years. Under our rates view, many Canadian mortgage borrowers may be forced in the coming years to refinance their loans at higher mortgage rates.

Here's Goldman Sach's analysis:

The recent rapid rise in house prices in Canada presents a risk of eventual over-heating.A model of bust risk that accounts for house price-to-rent ratios, past changes in real house prices, investment-to-GDP ratios, real GDP growth and inflation puts the probability of a 5% or larger downturn in real house prices over the next 5-8 quarters at around 30%. At the same time, we see significant differences between the US housing market in 2007 and the Canadian market in 2017, and for this reason we think it may be early to look for a downturn in Canadian house prices of close to the magnitude seen in the US before the financial crisis.I don't think GS is on the money with this one...

The recent rapid rise in house prices in Canada presents a risk of eventual over-heating.A model of bust risk that accounts for house price-to-rent ratios, past changes in real house prices, investment-to-GDP ratios, real GDP growth and inflation puts the probability of a 5% or larger downturn in real house prices over the next 5-8 quarters at around 30%. At the same time, we see significant differences between the US housing market in 2007 and the Canadian market in 2017, and for this reason we think it may be early to look for a downturn in Canadian house prices of close to the magnitude seen in the US before the financial crisis.

I don't think GS is on the money with this one...

Justin B. · Answer

Interesting that if you google more about this you can find a ton about the Chinese blowing up the housing market similarly to how they've raised the property rates in Australia beyond what's affordable. I think cutting off the Chinese will have a huge effect on the demand in Canada...

http://globalnews.ca/news/3350193/canada-launder-money-real-estate-report/

What's Up with the Canadian Market Eh?

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