In: Real Estate News30 Jun 2011
Some American friends were visiting us in Toronto. We took this opportunity to discuss the difference between the Canadian and US Real Estate Markets. We discovered some very interesting assumptions about both markets.
The American housing market has lost close to 30% of it’s value over the course of the last 3 years. The American real estate boom took place between 2000 and 2007. Home prices more than doubled. Low interest rates, high ratio mortgages, and a strong cultural demand (everyone watching HGTV and saying “I want that”) were the main reason for the boom. Then the boom turned to bust and a home bought for $300,000 in 2006 is now worth less than $210,000. When the bust came, it was largely blamed on “sub-prime” mortgages. Basically, the banks were lending to buyers with no money down or perhaps only 5% down. When the recession hit and home owners lost their jobs, home values began to drop and some people stopped paying their mortgage. Massive foreclosures forced the market down and continues to do so.
So here we are in 2011. American homes are currently at 2001 prices. Mortgage rates are at 4% and Americans can obtain mortgages for 30 years (they don’t reset after 5 or 10 years). A 4% mortgage, guaranteed for 30 years! Why are people not buying homes. This is what we asked our American friend. Here is a transcript of our conversation…
PropertySold.ca: “Why are 1st time home buyers not buying homes in the US?”
American: “Well there are a few reasons, but the main one is that banks are tight with their credit. They are demanding 15-20% down in order to buy a home. Banks don’t want do high ratio lending anymore. So I guess it’s like Canada now and you need 20% down to buy a home”.
PropertySold.ca “umm…Actually most new mortgages in Canada are with 5% down and the mortgage rates reset depending on the mortgage (ie. 5 years)”
American: “Pardon? Oh, I thought that people were saying that the Canadian market didn’t crash because their was no sub-prime mortgages.”
PropertySold.ca: “Well typically Canadians have jobs and assets, so in that sense, we don’t do “sub-prime”, but we still do high ratio mortgages”.
American: “Well I guess that the Canadian unemployment rate is 7% and in the US, it’s around 10%. This makes a difference. But what happens when the economy starts to go south is that first people lose their salary based jobs, but then jobs like real estate agents, and home builders stop making money. If housing is a large part of your economy, then even a little shift starts the negative snowball…”
PropertySold.ca: “So basically you see the American housing market as a negative spiral and it’s stuck their because banks are demanding a higher down payment.”
American: “That’s the general picture, but also, American have seen housing drop for 3-4 years now. This also takes the heat out of the market. People don’t want something that’s going down in value. I guess it’s the exact opposite from Canada. In Canada people want homes because they are going up in value. We were the same way a few years ago. It’s amazing how quickly it can change. But I’m shocked that Canadian banks are allowing 95% mortgages and that mortgage rates reset. That sounds like a recipe for disaster”.
PropertySold.ca: “We will have to see if the Canadian market will end up like the US market. The Canadian Government is warning us to be mindful of the risks involved with accumulating “long-term” debt obligations because current rates are at all time lows and will be increasing. But despite of these warnings, Canadians have seen more than 6 years of declining interest rates and they don’t seem to be concerned. Last month, the average price of a home in Vancouver grew by close to 30% and Toronto was close to 10%. There is no sign of these types of increases slowing down yet.”
American: “Good luck. Seeing what I have seen in America, I would suggest to heed the warning from your Government”.
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