The U.S. sub-prime housing bubble burst in mid-2006, and the mortgage crisis has spread beyond the sub-prime market to the prime mortgage market.
The U.S. housing crisis has led to plunging property prices, a global credit crunch, a slowdown in the US economy, and tightened lending conditions by banks as they react to soaring mortgage defaults, in both the prime and sub-prime markets, causing billions of write-downs.
The Canadian market is far healthier throughout the same period, and will remain so in the foreseeable future. Canada has not experienced the sharp increase in arrears and defaults nor the sharp decrease in property values that has occurred in the U.S.
Problems in the U.S. are unique to that mortgage market:
The U.S. housing bubble reached its peak in 2005, and started deflating by mid-2006, and has since accelerated:
Average national resale house prices grew 8.96% per annum from 2002 to 2005 but declined by 3.03% per annum from 2005 to 2008. Prices at end of 2008 were 8.61% lower over than end of 2007.
In the U.S. Mid-West and West regions, average prices fell 13.4% and 27.3% year-over-year at end of 2008 from 2007. In cities like Las Vegas and Miami, average prices at end of 2008 plunged 33.0% and 28.8% respectively year-over-year.
Housing starts for 2002 of 1.7 million grew to 2.1 million for 2005, an annual growth of 6.65%. Housing starts have since declined 56.19% per annum, dropping sharply to only 0.9 million for 2008.
Mortgage defaults and foreclosures soared to record high levels. Delinquencies in both the prime mortgage market and subprime market rose sharply.
The main culprits behind the U.S. sub-prime market meltdown have been well-documented by the press:
• Aggressive lending practices, irresponsible borrowing, creative Wall Street financial engineering, riskier product design, less onerous underwriting, etc.
Mortgage interest deductibility
• Holding consumer credit and debt and having equity in your home is not tax efficient.
Borrower friendly laws
• Lenders must choose to either pursue covenant or foreclose (in the vast majority of state jurisdictions).
Dominance of commission based broker channel
• During the growth years, brokers account for in excess of 50% of new mortgage originations in the prime market and 70% in the sub-prime market.
A cultural attraction to leverage
• The ability to easily re-establish credit after bankruptcy removes much of the stigma.
Canadian mortgage market is different from the
| US | Canada | ||||
| 2002-2005 | 2005-2008 | 2002-2005 | 2005-2008 | ||
| Sales price increase per annum | 8.96% | -3.03% | 9.72% | 6.50% | |
| Housing starts increase per annum | 6.65% | -24.05% | 3.22% | -2.18% | |
Canadian Outlook:
• Latest outlook by CMHC: “the economic downturn will result in a decrease in demand for home ownership leading to a decline in housing starts and existing home sales in 2009”.
• This is echoed in CREA’s forecast: “home sales activity is expected to decline in 2009 before rebounding in 2010”, “average home price is forecast to decline in 2009 and stabilize in 2010”.
Why is the Canadian market different?
Lack of mortgage interest deductibility. No interest deductibility for tax – therefore no tax incentive to own.
Lender friendly laws. Personal covenants in 8 of 10 provinces.
Origination landscape has been dominated by banks. About only one-third of new originations from broker channel, remainder through bank branch and other sales networks.
Subprime market was at a much earlier stage of development. The sub-prime market in Canada is estimated to be only about 5% of the total mortgage industry versus historically 20% in the U.S.
The result?
Less aggressive products and policies. No option ARMs with teaser rates, no interest-only products, no negative amortization.
Defaults for both prime and sub-prime much lower
• U.S. Prime vs. Canada Prime: 4.70% vs. 0.37% (Q1 2009)
• U.S. Sub-prime vs. Xceed uninsured: 24.88% vs. 3.37% (Q1 2009)
Download and read the full Xceed June 2009 US and Canada Mortgage Market Comparison
