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The housing
market in the U.S. has collapsed as a result of greed and poorly
regulated lending; a combination known as the "Sub-prime
mortgage crisis."
The
Canadian housing market will not collapse as a direct result of the
Sub-prime crisis, or from a Canadian version of it. It could be
affected, though, by the recession that the Sub-prime crisis has
caused in the U.S. economy.
To
understand why we aren't, and are, vulnerable, it helps to put the
scale of Sub-prime mortgages in the U.S. and Canada into perspective.
There are
U.S. politicians and economists who are trying to downplay the crisis
by pointing out that the foreclosed houses only represent 10% of the
market. It's not a big issue, they insist.
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 common.
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.
During TV
coverage of Ohio's Democratic Presidential Primary election, one
commentator pointed out 2/3 of mortgages in the state are in default.
(I will leave it at that, which is scary enough, but my memory of
what he actually said was that 2/3 of HOUSES were in default.)
In the U.S.
overall, estimates that as many as 40% of mortgages are 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 their
sub-prime mortgage crisis has caused some pretty big ripples on the
global pond.
The
stock-market crash of 1929 foreshadowed the subsequent crash of the
U.S. economy, otherwise known as the Great Depression.
The
housing-market crash of 2008 has precipitated a recession in the
U.S.A. and has caused questions about the stability of the global
banking system.
As one of
their biggest trading partners, our manufacturing jobs, and the
mortgages those salaries pay in eastern Canada, are affected if Mr
and Mrs U.S.A. Consumer stop buying.
So far,
only Ontario and Quebec, the manufacturing heartland, have been
affected. These provinces are in a recession, but we went through a
recession in Ontario in the early 1990's and housing prices kept
climbing through it.
I'm
monitoring the numbers and they suggest that the Barrie (and GTA)
market is tipping over into a buyer's market, but not into a crash.
See Where is the Market Going?
That's bad
news if you're selling, but if you're buying, see Who
Should Buy in 2008? |
