This will be a slow week on the economic front, as the only economic data out of Canada today is the release of data on the price of new homes in March. Prices rose 0.2% compared to a month earlier, matching economists’ expectations.
Year over year, new home prices are up 6.1%, a healthy number, although the market is appearing to slow down a bit as the increase this year is slightly lower than last year’s.
Overall this is good news. Continued strong sales in new homes will encourage developers to begin new projects, employing laborers and strengthening the economy. Eventually we’ll meet a point where we’d expect to see a decrease in sale prices as inventories of new homes pass the number of people looking to purchase them. This is normal in a market economy and there is no evidence to suggest the type of collapse that happened south of the border.
Canada has long been a fiscally conservative nation. The strong banking sector has steered consumers in a responsible direction under their watchful risk averting eyes. There is no sub prime mess in Canada because the banks would never lend funds out to such high risk consumers. However, this Globe article has me starting to think otherwise.
I recently purchased purchased some property. At the bank I gave my income and financial info to the banker and their computer system spat out my maximum purchase price, which could be increased if necessary. They can increase the number by increasing the term of the mortgage. 25 years, which a generation ago was considered the max mortgage is now the standard. 30, 35 and 40 year mortgages are becoming more popular. One bank is even running billboards advertising a 0 down mortgage. With 0 down and 40 years of payments, almost anyone can afford a little place with today’s interest rates. But what about tomorrow? What happens if Joe with 0 down and 40 years to pay loses his job in 2 years? He’ll quickly discover that he has not built any equity because almost 100% of his payments for those 2 years were interest.
Joe will default.
The same goes for interest rates. If rates spike up, Joe might not be able to afford his payments.
The end result? Not a meltdown like the US, but a serious dent in the real estate market.
