Wednesday, November 18, 2009

Mortgage lender warns of housing bubble

File this article under: "No Shit Sherlock" and to beat all it is significantly worse in Vancouver.

November 12, 2009, Tony Wong, Business Reporter - Toronto Star

Low interest rates have caused some Canadians to act "irrationally" in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road, says the president and CEO of ING Direct Canada.

"You have situations in some markets such as Toronto where people are making multiple offers for homes, they are paying thousands more and waiving conditions. It gives me concern they may not be thinking rationally, and this could lead to problems," Peter Aceto said in an interview Wednesday.

"Canadians are also paying their homes off slower and slower, and the concern for me is that they are buying more house than they can really afford."

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

"It's almost as if Torontonians feel very concerned they are missing something with such low rates." said Aceto. "The problem is: can they afford to pay for their mortgage five years from now, when interest rates go back up?"

Sales of existing homes in the Toronto area were up 64 per cent in October from the same time last year, while average prices hit a record $423,559, up 20 per cent. Bidding wars have become common in choice neighbourhoods.

Bank of Canada Governor Mark Carney has already expressed concern that an asset bubble may be forming. And other financial community heavyweights such as CIBC World Markets senior economist Benjamin Tal told the Star last week that consumers are "blinded" by low interest rates.

However, Aceto is the first bank president to express concern over the housing market.
He acknowledged that his comments will likely not be popular with money lenders since he is also in the business of selling mortgages. "What I do know is that we shouldn't be focused on the short term," he said

"We shouldn't be interested in just selling mortgages to get our numbers up for the next quarter. If banks help our customers make the right financial decisions, then we will have a healthy and happy consumer and economy. It just makes sense."

Aceto's former job at ING was chief risk officer. He spent two years in California during the height of the real estate bubble, and felt that Canadians would not be as spendthrift as their American counterparts. But when he arrived back in Canada he was surprised to see that some consumers were acting in a similar way.

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think," said Aceto.

For consumers with 35-year amortizations, which ING sells, he advises that they accelerate their payments.

"That way if you have a $300,000 mortgage, instead of owing $280,000, maybe you only owe $200,000 when rates are higher. It prepares you for difficult times," said Aceto.

Despite his concerns, Aceto maintained that the Canadian economy is in much better shape than the U.S., where zero-down and longer amortizations created a massive housing bubble. And he said the Canadian government has done a good job in limiting long-term amortizations to 35 years.

"The banking system is much more sound, but that doesn't mean we should be complacent," he said.


Unknown said...

I am still amazed many people take on 35 year mortgages. Even if you are 25 when you buy (lower than most FTBs I would expect, does anyone know the average age a person buys their first place?) you will be 60 when you pay the thing off.

I know the idea is that you sell or accelerate payments before the actual 35 years, but assuming rates go up and the market goes down, the person is basically screwed because they cant sell for profit and they probably cant increase payments due to the higher rates.

Who on earth would want to be paying off the first home they buy (right now almost always a condo) when they are 60? Odds are you would want an actual house at some point if you have a family.

I would never plan on anything more than a 25 year mortgage, and even if I got that I would try to pay as much extra as I could while rates are low to hopefully lower the time to 15-20 years. Even then I would still be 40 when I pay the place off. Pretty good by todays standards but my parents had their place paid off before they hit 35, and that wasnt uncommon.

I would really like to know what these buyers are thinking going with the 35 year loan. Dont they realize how freaking long 35 years is???

David Pylyp said...

Great! Negative News Sells! We're all focused on the "Bubble" How can prices keep going?

We're a safe haven for money. Our banking system is sound. CMHC is not undermining the Canadian Financial system or pushing prices upwards.

Talk is Cheap.

David Pylyp
Living in Toronto

highplains said...

Finally some rational news. Im out in vancovuer and I just cant understand how we've pretty much 'fully recovered' already. it doesnt make sense.

Mr. Pylyp is a real estate agent not really making any great points so take what he says with a grain of salt.

I know lots of people taking on all they can handle homewise at low rates. these low rates will not be around forever and when the second crash of small business and commeral real estate happens in the states and the interest rates go up here, they are going to be in trouble.