|
The housing
market in the U.S. collapsed as a result of greed and poorly
regulated lending; a combination known as the "Sub-prime
mortgage crisis." The Sub-prime crisis was one part of a perfect
storm of economic problems.
Many
people forget that the
lingering recession that we are now
in, in 2011, wasn't triggered by the collapse of the USA housing
market, but rather by the high gasoline prices in 2007.
The
sub-prime mortgage crisis was lurking in the background all through
the good times. It took the high gasoline prices, and the resulting
higher cost of food and consumer goods, to cause the victims of
sub-prime purchases to throw their hands in the air and walk away
from their houses. The rest of American homeowners are still reeling
from that punch.
The
mortgage crisis turned into a banking crisis, then an insurance
crisis, then a global credit crisis. Governments borrowed and stole
from whoever they could to come up with the money to bail out the
institutions. The banks reopened and it looked like the problem was
resolved, until Europe started collapsing in 2011 from the same
reliance on debt.
Canadians
have smugly sailed through it all, being admired internationally for
our stodgy banks and conservative borrowing rules. Late in 2011,
though, the International Monetary Fund issued a warning that
Canadian household debt had risen to a level higher than that of U.S.
households when the real-estate market collapsed in 2007.
My own
recent analysis (statistics)
has led me to conclude that our real-estate market is only holding
up because of a shortage of houses on the market.
There are
fewer houses for sale because the people who bought 5 years ago, and
who would normally be selling now, can't sell because they bought
under CMHC's own version of sub-prime, with no money down. The values
of their houses hasn't risen enough for them to sell and pay off the
mortgages and the Realtor's commissions. Their numbers are small, but
they are huge in impact, and the U.S. experience is chilling.
When the
Sub-prime crisis was breaking, in 2007, there were U.S. politicians
and economists trying to downplay the crisis by pointing out that the
foreclosed houses only represented 10% of the market. It's not a big
issue, they insisted.
10% of an
average thing isn't a big issue, but 10% of the housing stock being
foreclosed looks like a much larger problem where the rubber hits the road.
When the
average family in the U.S. goes for a Sunday drive through their
neighbourhood, they're seeing a Foreclosure For-Sale sign in front of
every 10th house.
Remember,
though, there are houses on both sides of the street. They're driving
past 5 houses and seeing a Foreclosure sign on the left, then driving
past another 5 houses and seeing a Foreclosure sign on the right.
It's still
one in ten houses, but the visual impression is that it's much more widespread.
In addition
to the Foreclosure for-sale signs, they're also driving past the
for-sale signs for non-foreclosed houses that normally would be up
for sale in a normal market. (10% of houses spread out over an
average year.)
The visual
impression is that there are a sea of houses out there to choose
from. With so much supply, prices fall. The final blow to the market
occurs when buyers see that prices have dropped, and then hold off
buying because they think house prices will go even lower. More
supply and even less demand drives prices even lower, in a
self-fulfilling prophecy.
Obviously,
the 10% of foreclosed houses aren't spread out equally over every
street and every city. If one neighbourhood, or city, has less than
10% of its houses being foreclosed, it means there's another
neighbourhood or city that has that many more than average being foreclosed.
In the U.S.
overall, estimates were that as many as 40% of mortgages were
sub-prime, and thereby suspect. In contrast, sub-prime mortgages in
Canada make up less than 1% of total mortgages. That would translate
only into one Foreclosure for every 100 houses if every sub-prime
mortgage defaulted.
The U.S.
sub-prime mortgage crisis won't repeat itself in Canada, but if
you're buying, you need to be working with a Realtor who can explain
how the debt your are taking on will affect your future. |
