Vancouver Housing Market Not Headed for a Crash
Well, with tales of Vancouver housing market doom and gloom yesterday rippling through the media, today, John MacGee of the CD Howe Institute has released a research paper arguing that all is well with the Vancouver real estate market.
The central argument is that Canada will not experience a similar housing market meltdown that the US experienced due to much tighter mortgage underwriting policies by the big Canadian banks and major mortgage insurers (CMHC and Genworth). The Institute argues that while monetary policy in both countries was similar during the ‘boom' time between 2000 and 2008, the subprime elements of each market were structured and regulated very differently.
The Canadian banks were nowhere near as aggressive as the US banks introducing new, exotic sub-prime mortgage loans such as interest-only or negative amortizing loans. Less than five percent of the total mortgage loans originated in Canada between 2005 and 2008 were sub-prime in nature. In the US, for this same time period, sub-prime loans represented about 25% of total mortgage volume originated.
If you want my opinion, Wall Street was a huge driving factor behind the propagation of these sub-prime loans. The ‘quants' or number crunchers employed by the big investment banks couldn't create lucrative ‘mortgage secured' debt instruments (MBS, then CDO's or call them what you want) fast enough to repackage and sell to someone else at a massive premium. The rating agencies (Standard and Poors, Moody's) gave everything an ‘AAA' rating regardless of whether the loan pool contained subprime or not. So why not continue bundling up these loans, as fast as unqualified, working-class Americans could borrow and continue selling them off for millions of dollars to some greater fool?
But I digress. Throughout the entire boom-bust period, Canada maintained much stricter mortgage underwriting guidelines than the US. The Bank Act requires that all loans with less than 20% down payment be insured by government insurer Canada Housing Mortgage Corporation. Canada's financial institutions did relax these guidelines slightly when the lending party was in full swing in the US, but not enough to have done much damage. The US embraced more lenient underwriting standards which rapidly increased their exposure to high-risk mortgage products such as low-documentation, interest-only and adjustable rate mortgages.
For this reason, according the CD Howe Institute, the sky is not falling and Canada's housing market will not crash and burn al la Garth Turner an the other doomsayers.
It'd be nice to have a crystal ball right now.
The central argument is that Canada will not experience a similar housing market meltdown that the US experienced due to much tighter mortgage underwriting policies by the big Canadian banks and major mortgage insurers (CMHC and Genworth). The Institute argues that while monetary policy in both countries was similar during the ‘boom' time between 2000 and 2008, the subprime elements of each market were structured and regulated very differently.
The Canadian banks were nowhere near as aggressive as the US banks introducing new, exotic sub-prime mortgage loans such as interest-only or negative amortizing loans. Less than five percent of the total mortgage loans originated in Canada between 2005 and 2008 were sub-prime in nature. In the US, for this same time period, sub-prime loans represented about 25% of total mortgage volume originated.
If you want my opinion, Wall Street was a huge driving factor behind the propagation of these sub-prime loans. The ‘quants' or number crunchers employed by the big investment banks couldn't create lucrative ‘mortgage secured' debt instruments (MBS, then CDO's or call them what you want) fast enough to repackage and sell to someone else at a massive premium. The rating agencies (Standard and Poors, Moody's) gave everything an ‘AAA' rating regardless of whether the loan pool contained subprime or not. So why not continue bundling up these loans, as fast as unqualified, working-class Americans could borrow and continue selling them off for millions of dollars to some greater fool?
But I digress. Throughout the entire boom-bust period, Canada maintained much stricter mortgage underwriting guidelines than the US. The Bank Act requires that all loans with less than 20% down payment be insured by government insurer Canada Housing Mortgage Corporation. Canada's financial institutions did relax these guidelines slightly when the lending party was in full swing in the US, but not enough to have done much damage. The US embraced more lenient underwriting standards which rapidly increased their exposure to high-risk mortgage products such as low-documentation, interest-only and adjustable rate mortgages.
For this reason, according the CD Howe Institute, the sky is not falling and Canada's housing market will not crash and burn al la Garth Turner an the other doomsayers.
It'd be nice to have a crystal ball right now.