Wednesday, December 17, 2008

State of the Canadian Mortgage Market

The annual survey (pdf) from the Canadian Association of Mortgage Professionals is very insightful and I've been a reader now since they began the annual survey. This was the most interesting annual report I've seen yet and here are some of the highlights:

Home Equity Among Canadians - not an unhealthy situation overall but this does not reveal regional disparities and weaknesses.

Among home owners who have mortgages, the average amount of equity is $136,000, representing 51.7% of the average value of their homes ($263,000).

For owners without mortgages, equity is equal to the average home value of $280,000.

The total value of owner-occupied housing in Canada is estimated at $2.39 trillion. Mortgages on these homes total $664 billion, leaving $1.73 trillion in home owners’ equity. This equity is equal to 72.3% of the total value of the housing.

Mortgage Arrears - rising but historically low for now

The rate of mortgage arrears in Canada remains quite low, at 0.28% as of August 2008, which is just slightly higher than the 0.25% rate that has been typical during the past two years. The rise in the arrears rate was mainly concentrated in Alberta (from the below average rate of 0.15% a year ago to the current 0.30%, which remains close to the national average).

Speculation on Real Estate - nationally not a problem but BC has big problems and Alberta smaller problems

[A] key difference between Canada and the US is that an “investment motive” – buying based on expectations of price gains rather than based on real needs – generated a housing market bubble in the US. In 2006, resale market activity in the US was about 20% higher than it should have been based on economic fundamentals; current activity is 40% lower than it should be based on fundamentals. In Canada, there is very little evidence of an “investment motive”. Therefore, Canadian housing markets are not susceptible to the exaggerated downturn that has been seen in the US. However, there has been some investment motive in British Columbia, and BC may experience more of a market slowdown than the rest of Canada.

Equity Take Out - ALARMING - Canadians and especially BC residents have been using the increased values of their homes to cover over systemic financial problems and spend money they don't have. VERY ALARMING

The survey data indicates that 22% of mortgage holders took out equity from their homes or increased the amount of the mortgage principal within the past twelve months.

The average amount of equity take-out is estimated at $41,000.

Various findings from the survey can be combined to generate an estimate of the total amount of equity take-out by Canadian home owners:
• At present there are about 8.9 million owner-occupied dwellings in Canada.
• Next, we need an estimate of how many home owners have mortgages. The 2006 Census of Canada indicated that 57.9% of home owners had mortgages. This was an increase from 55.2% in the 2001 Census. Projecting this change suggests that at present about 59% of Canadian home owners may have mortgages, or about 5.25 million.
• 22% of home owners with mortgages have taken out equity during the past year.

Average amounts taken-out vary across the country, from about $30,000 in Atlantic Canada, Quebec and Saskatchewan, to about $40,000 in Ontario and Manitoba, $47,000 in Alberta, and $57,000 in British Columbia.

Those who took out equity were asked what they used the money for. Some people indicated more than one purpose. Therefore, the following responses add to more than
100% - on average, 1.27 purposes were given:
• 56% indicated that the money would be used for debt consolidation or repayment.
• 39% gave renovation or home repair as the purpose.
• 14% mentioned making purchases as the purpose.
• 7% mentioned investments.
• 11% mentioned “other” purposes.

From the responses, it is estimated that 40% of the (dollar value of the) take-out (or about $18.5 billion) was for debt reconsolidation and repayment. Therefore, while the amount of outstanding mortgage debt would have increased by this amount, totals for other types of debt would be correspondingly reduced.


mohican said...

I am just shocked at the Home Equity Line of Credit adoption and usage statistics. This is a very big problem that will weigh heavily on the national economy for quite some time I expect.

patriotz said...

[A] key difference between Canada and the US is that an “investment motive” – buying based on expectations of price gains rather than based on real needs

Buying on expectation of price gains is speculation, not an "investment motive". Buying a house to receive rental income without expectation of capital gains is certainly an investment, just like any other income investment like preferred shares or bonds.

Sorry if I sound like I have a bee in my bonnet but I don't like "investment" equated with "speculation". That's about 99% of what's wrong with our financial economy today IMHO.

mohican said...

I have the same bee in my bonnet patriotz. Guessing that the price of an asset purchased will rise in the future is speculation by definition - not investment.

Investments, on the other hand, should be based on the underlying income or a reasonable projection future income of an asset - corporate earnings, coupon payments, rental income, etc.

Wompeter said...

That definition should be enshrined. States like California wouldn't be in such huge trouble if they were limited to investments rather than gambling away their pension funds on spec.