Saturday, October 31, 2009

Easy credit now, housing woes later?

Great Globe & Mail article. Frankly, I have been surprised by the resiliency of the Canadian housing market. Despite the woes south-of-the-border and lofty unemployment rates, home sales here have been robust. The only driving factor as I see is historically low interest rates. And people's need to own a home at any cost.

I have long thought that people are over-extended and have sunk all their "wealth" into the value of their home. It seems to me that interest rates will have to increase eventually and a lot of people who have over-buyed and stretched themselves very thin will feel the sting. The impact won't hit U.S. proportions, but I feel this is inevitable.

Still, the Bank of Canada is in a bind. If they raise rates, the Cdn $ will increase. I suspect they will wait until the U.S. makes a move. Still, it will happen.

Easy credit, soaring prices raise new housing fears

"Ms. Pham, 28, and Mr. Burzese put $57,000 down on the $570,000 house early this year. The couple says they're comfortable with the debt. They make good money and are installing a basement apartment as a “mortgage helper.” But they might not have been able to get into the market were it not for the intervention of the Bank of Canada and the federal government – in the form of a continued low interest rates and federal policies aimed at maintaining the flow of lending and spending.

The interest rate on the their mortgage? Just 1.5 per cent.

By taking advantage of ultracheap interest rates to buy something they couldn't previously afford, the couple are doing exactly what the government wants Canadians to do to restore growth to the economy. Mr. Burzese and Ms. Pham may well be able to handle the new debt. But mounting consumer debt loads across the country are worrying some economists -- and even the bankers who are profiting from it."

“We know that interest rates will rise – the only question is when,” Mr. (Benjamin) Tal (of CIBC) says. “Even if you lock in a five-year mortgage rate, you have to realize that five years from now, they will be significantly higher than they are now. Clearly people have to be much more prudent in this kind of environment.”

"While heftier debt loads obviously make all borrowers more vulnerable to higher interest rates, consumers' increased exposure to real estate also means that they have become more susceptible to changes in the housing market."

"Canada's housing market is certainly not stained by the sort of excesses that characterized the U.S. market before the crash. Subprime lending in Canada is estimated to represent less than 5 per cent of the market, compared with more than 20 per cent in the U.S. prior to the crisis.

"But an ironic scenario could still unfold. In an effort to combat a recession that had its origins in a U.S. housing bubble, Canadian policy makers have responded with low rates that might create a bubble here, giving the mortgage market too much of a kick-start through low interest rates and a program of buying billions in mortgages from the banks."

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