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Bill Rinehart, Realtor®/Salesperson

Coldwell Banker The Real Estate Centre, Brokerage

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. 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.

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