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Bill Rinehart, Realtor®/Salesperson

HomeLife/Kempenfelt-Kelly Realty Ltd, Broker

705.436.5111

Will the Sub-Prime Crisis come to Canada?

$349,900 Builders home in Innisfil near lake. 1 year old 1900 sq ft on large lot. Click pic for more houses.

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?

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