Canadian Mortgages Vs US Mortgages

The Canadian mortgage market has been sitting on the edge of a precipice ever since the American market burst in 2007. Six years later skeptics and pundits alike are still trying to predict when the housing market and the corresponding mortgage market will burst in Canada.

6 years later in 2013 the proverbial dam still hasn't burst.

If you want to buy a home in Canada you should first arrange financing and think in terms of whether you can actually afford this mortgage - or whether it is better to wait until real estate prices come down in 2015-2016 - when the dam is expected to finally burst.

According to CIBC economist, Benjamin Tal, there are many rational reasons why the Canadian mortgage market continues to sit on the edge of a precipice - and is firmly entrenched there, waiting for the eventual avalanche.
 

Tal admits that all is not well with Canadian housing. It is floundering and there is a lot of doubts and lack of confidence in the market, and yet Canadians keep buying homes and condos anyway because people need a place to live and they're tired of waiting for the market to collapse. Patience is a virtue, but everyone has their limits for how long they will wait.

 

"Any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market.”says Benjamin Tal.
In a nutshell the Canadian and USA mortgage markets differ in the following ways:

The U.S. mortgage interest tax deduction - This American tax benefit played only a limited role in stoking the U.S. housing bubble. The absence of this rule in Canada means that Canadians can't claim mortgage interest on their income taxes, and thus they have to be more prudent and careful about whether to buy a house and get a mortgage.

Lender recourse - Canada’s recourse system (which keeps people on the hook after foreclosure) does “not provide a full shield from a substantial fall in prices,” says Tal. In the USA, only 12 states have no-recourse law. According to some sources the probability of mortgage default is actually up to 20% higher in non-recourse states - meaning Americans in the USA were more likely to default on their mortgages - which meant the banks would take bigger losses.

When you default on a loan (any kind of loan) in Canada, lenders send the hunting dogs after you in the form of really annoying phone calls from collection agencies and letters from lawyers - but if you don't have any money or assets or a job, they really can't do anything to you. And worse comes to worse, you declare bankruptcy and have bad credit for 7 years.

Canada’s low arrears rate - Canada’s minuscule default rate is pretty stellar and is slightly less than half that of the American average default rate (pre-2006). However we should note that Canada's other debts (credit cards, student loans, lines of credit) have skyrocketed since 2008, suggesting that many Canadians are paying off debtors by borrowing money from other sources - and eventually that money has to be paid back.

In contrast in the USA: “In a short eighteen-month period in 2007-08, the serious mortgage arrears rate in the US surged by more than 300%," says Tal.

So Canada hasn't reached that point yet. But we could if Canadians continue to pile on consumer debts with credit cards/etc.

The American arrears spike was also largely caused by legal underwriting that was either near-criminal or even outright criminal on the part of the banks giving out mortgages. 

Rate Sensitivity - Canadian mortgages are more vulnerable to interest rate hikes than the average American because our terms are far shorter (5 years versus 15-30 years).

Less subprime - The American crash and "Great Recession" was largely the result of subprime mortgages and risky floating rates. Canada still has subprime mortgages but they are comparatively rare because Canadian banks are more cautious about who they give mortgages to.

However this doesn't completely protect Canada. Foreign investment in Canadian real estate has created a bubble in major cities, and if something ever happens to hurt the bubble then those markets will collapse in a flash. If a collapse happens in Canada it won't be subprime mortgages, it will be foreign investors pulling out all at once which will sink the ship.

Negative Equity - One-third of American mortgages in 2005-2006 were already in negative equity. Over 50% of the mortgages had less than 5% equity, thus “making [Americans] highly exposed to even a modest decline in prices,” says Tal.

In Canada however only 15-20% of new mortgages have less than 15% equity. Plus negative equity is virtually non-existent in Canada, and out of fear such mortgages were phased out pretty quickly by Canadian banks.

No teasers - Millions of Americans got teaser mortgages with rates that reset a few hundred basis points after 2 or 3 years. So they would start a mortgage thinking they got a deal and could afford it, but when the rates reset they were screwed and couldn't afford the home they had purchased - and were locked into it so they had no choice but to default. Over $2,000,000,000,000 dollars worth of mortgages were reset in 2006-2007 alone.

Canadian banks don’t give teaser rates. Borrowers must prove they can afford the normal higher rates in advance.

Tighter housing supply - New Canadian housing starts have exceeded household formation by only 10% in the past decade. That means that Canadians have a comparatively small number of available homes whereas the USA was building new homes like crazy, building so many that it was outpacing demand. The USA was outpacing demand by 80% right before the crash.

Note: In Toronto and Vancouver the new condo market is outpacing demand by approx. 40%, and those condos will be finished being built by 2014-2015, which means Toronto's condo market should implode by that time.

Debt-to-income Ratio - The debt to income ratio doesn't really matter as long as the economy in Canada stays stable. Yes, Canada's debt to income ratio is really bad and is growing worse... but as long as the economy and employment rate stays the same Canadians should be okay.

Better credit - Canadian credit scores have improved since 2008. In contrast during the four years heading into America's Great Recession, the ratio of “risky” borrowers rose by 10+ percentage points and comprised 22% of the market. Many Americans simply had really bad credit, largely due to a floundering economy during the Bush era.

Yes, Canada hasn't been touched yet. But if we keep piling on household debt and spending beyond our means the collapse will come eventually.

Vancouver Real Estate to collapse in 2013

Now when I say collapse what I really mean is a gradual decline of prices over 2013 and 2014 of roughly 25%.

Home and condo prices / sale records in Vancouver have taken a dive in 2012. Prices for single-family homes, condos and townhouses are down 4.5% and sales are down approx. 25%.

Normally the Vancouver housing market sells 88,000 homes per year. That is the average sold from the 2002 to 2011. The average typically doesn't fluctuate more than 5 to 10% above or below.

In 2012 sales dropped to 64,000 as of December 28th 2012. With only a couple days to go before the end of 2012 we really don't expect Vancouver's home sales to get above 68,000.

Especially when buyers aren't that interested in buying right now, due to combination of new mortgage changes, interests rates and the fact that almost everyone in the Vancouver real estate industry is predicting a collapse in 2013.

So here is the thing... Lets do some math. Lets say they did manage to sell 66,000 before the end of 2012. That means Vancouver's home sales are down by 25%. That is a huge drop!

To be fair the Vancouver real estate market, especially the condo market, has been in a slump since 2009. They've been kind of waiting around, half expecting a crash, but nothing really happening that would become the tipping point.

Something like a recession, to push the real estate market over the cliff. Instead its just been stagnated and in 2012 its even been in a slow decline as buyers have stopped buying.

To have a huge rapid decline, like a drop of 25 to 50% in the space of a year or two, you would need something bad to happen that would hurt the local economy. A fiscal cliff.

But it just isn't happening, which is why I am currently predicting Vancouver will continue to see a gradual decline well into 2014. I don't think we will see a huge decline in the Spring of 2013. I think we might see a sharper decline in the Autumn of 2013...

But I think Vancouver's home prices will overall drop about 20 to 25% by the beginning of 2015, and I think it will then suddenly drop an extra 15% in 2015 as Canada is hit by a recession.

Now you might say this is a pretty radical and detailed prediction for the future of real estate in Vancouver. And you are certainly free to think and say it.

But my predictions are based on pattern observation. I see a pattern developing in Vancouver, and I think that pattern shows a gradual decline until a recession in 2015.

To confirm, here is my precise predictions:

Spring 2013 - Sales slump. Normally Spring is the best time of year for real estate sales, but in 2013 it will be down on sheer volume and prices will drop about 3 to 6% compared to an all time high.

Autumn 2013 - Sales worsen. Inventory of unsold homes becomes worse. Prices drop an additional 4 to 7% by the end of the year, making the total for the year down 7 to 13%.

Spring 2014 - Pre Recession Slump. People keep expecting prices to level out and reach bottom, but prices continue to drop another 4 to 8%.

Autumn 2014 - Sales slow to a crawl. Starts to bottom out when prices hit approx. 24 to 29% below the May 2012 average price.

2015 - The recession hits Canada full throttle and prices plummet an extra 10 to 15% in 2015.

Now you might think this seems a bit extreme. But I should tell you that Vancouver's index price for single-family homes, condos and townhouses stood at $596,900 in November of 2012 – a drop of 4.5 per cent since hitting $625,100 in May of 2012 (the highest point).

All it needs to is for the average price for that index to drop another 4% to $575,000 by May of 2013. Or worse, to an average of $556,000.

And by the following year, May 2014 to drop to somewhere between $531,000 and $469,000.

I predict Vancouver's condo market will be the most effected and see the deepest slide in prices during the next 3 years. New condo builds will crawl to a stop by 2014.

How accurate my estimates are a matter of debate, but it will be interesting to wait and see if I am right.

Additional note, I am expecting one of two things in 2016.

Either prices will stay slumped, with only marginal 1% gains in 2017... Or a swift rebound of 4 to 8% in prices. But that will depend on how deep the recession is during 2015 - 2016.

I am expecting a similar slide in Toronto, but I don't expect it to dramatically effect prices in Toronto until 2014, and I am predicting the price changes in Toronto to be much more delayed and sudden. Gradual decline in Vancouver, sudden impact in Toronto.

Various other markets across Canada will also see varying degrees of gradual decline and sudden impact. I am predicting more gradual declines in Western Canada and these changes will spread eastward. When it reaches Toronto and Montreal the effect will be like an iceberg hitting the Titanic.

2015 is also when a huge surplus of condos will go on the market in Toronto due to new buildings that will be finished by that year. The surplus will be dumped on the market in 2015 and people expecting a crash in 2014 will have decided to wait a year, causing prices in 2014 to slump. When the Toronto condo market bursts in 2015 it will be sudden and dramatic, but not unexpected.

I predict condo prices in Toronto to drop 40% during the 2015 and 2016 time period and house prices to drop 20%. There will be a marginal (1 to 2%) rebound of prices by 2017.

10 Examples of Ice Architecture

Why I LOVE polished concrete

Whether you are building your dream home or looking to flip a house for a handsome profit, polished concrete is the way to go.

I first saw polished concrete and realized its potential when going to York University here in Toronto, Canada. One of the buildings had polished concrete walls and floors and it was smooth and shiny like marble, but without the expensiveness of marble.

I immediately envisioned whole buildings and even sidewalks with polished concrete. Everything shiny and smooth.

I think it really comes down to the fact that people like smooth and shiny things. Consider the following:

Marble
Silk
Satin
Glass
Stainless Steel
Chrome

They all just scream luxury.

Lets say for example you want to purchase a table. Do you want a rough-hewn table that has never been polished or even sanded? Or a polished wood table which looks so clean you could eat off of it.

Check out the website http://forrestconcrete.com for example. It has polished concrete floors, concrete countertops and they do a variety of residential and commercial work. So as a company they obviously know what they are doing.

If you browse their website and similar websites (or if you do a Google image search) you can see lots of images of the amazing things companies can now do with polished concrete.

For example, you can use pieces of other rock to polish into the surface and make the concrete look even shinier than a normal polish. By using quartz dust for example you can make the surface sparkle, by using marble dust you can make it literally look marble (or as I like to call it, "faux marble").

Another thing they can do, instead of dust, is use tiny chips of colourful rocks. Thus whether you use dust or rocks you can make different colours, shades or even a rainbow of different colours by overlapping various colours and grinding/polishing them into the surface of the concrete.

You can make designs, shapes, patterns and even mosaic-like artwork. It will be more costly for sure, but there is a lot of amazing things that can be done with building materials these days.

You could even, from a distance, make the floors look like polished wood and only up close would you realize its just the same colour.

And that is just the architectural playfulness. You can also make tabletops, coffee tables, kitchen counters, chairs, decks, balconies, columns...

Knowing me, I would probably make artwork and sculptures if I had an ample supply of concrete and a grinder to polish it with. Or even better, artwork that doubled as exercise equipment for parks so adults could do chin ups on it. :)

Oh I forgot pools! Yes, you could also make a pool. You just wouldn't want to dive in and bang your head on it. That is painful whether its concrete or not.

The example I've been using of Forrest Concrete is in South Carolina, but there are certainly lots of companies locally you might wish to check out.

In Toronto for example there is:

floorlab.ca

concreteartfx.com

torontopolishedconcrete.ca

uniquetouchconcretedesign.com

concrete-polishing.ca

ttmfinishes.com

concreteyourway.com

marblerenewal.ca

and a dozen or more other vendors. So yeah, no shortage of concrete polishing companies in Toronto.

So whether your home is a house or a condo you can certainly shop around and get something special for your home.

Or office! Doh, I forgot offices. Polishes countertops in reception or a desk with a polished concrete surface. Or a boardroom table. OOOOOOOOoooo!

Anyway, I think my point has been made. So many possibilities to create shiny surfaces that amaze friends, guests and clients.

Mortgage Life Insurance

I think the title of this post is pretty self explanatory.

Basically what Mortgage Life Insurance is life insurance so that if you die, and thus cannot pay your mortgage payments, your family members can collect the insurance and the lump sum will be enough to pay off the remaining mortgage on your home.

Although in theory, you could just get a standard life insurance policy, with a big payout, enough to cover the mortgage and a little left over.

Except that the actual value of the mortgage goes down over time. Which means that in theory the cost of the insurance should also go down over time. Except that isn't how it actually works. Instead the premiums keep going up as the person gets older, even if they are in perfect health.

Thus Mortgage Life Insurance ends up being very profitable for insurance companies because the premiums keep going up and the payouts decrease over time. It is so profitable that many banks now sell Mortgage Life Insurance too whenever someone asks for a mortgage and the bank employee gets a commission every time they sell someone a policy. Some of it even verges on "Tied Selling", meaning they give you the mortgage and pressure you into the insurance to the point that you don't have any other choice.

1st Note: Tied Selling is illegal in many countries, including Canada.

2nd Note: Buying Mortgage Life Insurance is not mandatory when buying a mortgage. There is no laws requiring it. (In some countries bicycle stores are required by law to make sure you have a bell and helmet if a child wants to buy a bicycle. Because if the kid gets killed on the bicycle and they weren't wearing a helmet, the bicycle store can be liable for not asking if they owned a helmet. In theory they are supposed to sell you a bell and helmet if you don't have one.)

3rd Note: This should not be confused with Private Mortgage Insurance, which is meant to protect the lender against the risk of default on the part of the borrower.

When the Mortgage Life Insurance commences, the value of the insurance coverage starts off being equal to the capital outstanding on the repayment mortgage and the policy’s termination date will be the same as the date scheduled for the final payment on the repayment mortgage. Thus when the mortgage is paid off the insurance is likewise terminated. The insurance company providing the Mortgage Life Insurance calculates the annual rate at which the insurance coverage should decrease in order to mirror the value of the capital outstanding on the repayment mortgage. Even if the client is behind on mortgage repayments, the insurance will adhere to its original schedule and will not keep up with the outstanding debt if the person falls behind on payments.

Some mortgage life insurance policies will also pay out if the policyholder is diagnosed with a terminal illness from which the policyholder is expected to die within 12 months of diagnosis, but many will refuse to pay and declare the policy void. Insurance companies sometimes add other features to a Mortgage Life Insurance policy to reflect economic conditions, problems in the domestic insurance market and various domestic tax regulations.

The thing is that when it comes to actually buying Mortgage Life Insurance there are a lot of companies out there, and you don't know which ones actually will payout if there is ever a problem such as the policy holder being diagnosed with cancer and then their family being left out to dry with the insurance company refuses to pay.

Thus lets pretend for a moment you are considering getting Mortgage Life Insurance... Which company should you hire? How much should the premiums be? What are the guarantees they will actually pay out?

Well, the wisest answer is to shop around and ask. Compare prices. Don't be pressured with a big sales pitch or shiny one-time discounts (those are tricks to get you to sign up today).

Why? Because I honestly can't tell you which companies are the best. Although in theory you could research various companies online and try to determine which ones have a good reputation. Proceed cautiously and don't assume that just because its a bank trying to sell you the mortgage that they are any more reputable. Banks are in the insurance business to make MONEY. And that person trying to be all friendly and selling you the policy just wants their commission for kissing your behind.

Now you might think, oh what the heck, just get the first policy you come across. No. Proceed cautiously and wisely. Especially if you already have health problems and the insurance company may try to refuse to pay out to your relatives after you are gone.

Note: Car dealerships do the same thing, selling you insurance car loans. Buyer beware.