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  • Mortgages, Real Estate and Canada’s Economy

  • An interesting situation occurred last week. A client of ours has had trouble selling their home at a modest price but in a popular area. At Robert Floris’ office, we try not only to analyze but be at the forefront of where the real estate market would be heading.

    Last year, in the spring, we believed the price of oil would remain soft which affected the Albertan real estate. Major analysts and observers believed it would have little or no impact on house prices. We boldly predicted that cracks would start forming and it will drop real estate values. For the record, we do not believe oil will rebound in the next year and we really believe the downtrend in prices for Alberta will continue.

    Hamilton and other parts of Canada have seen incredible gains in values of home prices in recent years. Is it sustainable? The reality to me is nothing goes up forever. I’m not being a doom and gloom prophet. Unfortunately I lived during the last real estate boom and this eerily reminds me of the same euphoria.

    I started looking into other areas to validate my concerns. My most important research involved The Office of the Superintendent of Financial Institutions (OSFI) which is the bank regulator wants to address the country’s overheated housing market to see if banks would be strong enough to withstand a severe drop in house prices. “Persistently low mortgage rates, record levels of household debt and rapid price increases in Canada could generate significant losses if economic conditions worsen”.

    The risks are getting larger, that is for sure.

    Moody’s which is a rating agency just did a study. They noted that Canada’s big banks could and would survive a real estate downturn. Their recent conclusion was the Big 6 could withstand a decline of 25% to home prices without catastrophic losses. They based these findings on 3 factors:

    1. Canadian mortgages are of higher quality than the U.S. ones were.

    2. Only 5% of mortgages are considered sub-prime.

    3. Canadians do a lot less securitisations. This means they do not sell off the mortgages therefore risk would not be spread to other areas.

    So what is the final conclusion?

    Well if bank regulators are worried, then so am I. They are on the pulse of the situation. It was simple to predict the Alberta situation, oil constitutes so much of their economy, the spin off consequences are natural.

    I hope this dreaded recession does not occur because most Canadians are not financially ready. The one silver lining is that mortgage rates are extremely low and for most Canadians, they could not rent any cheaper.

    BE CAREFUL.

    Robert Floris is a mortgage agent serving Hamilton East Mountain, Burlington, Mississauga, Toronto and the rest of the GTA including Ontario and the rest of Canada. He believe in getting the client the best mortgage rate but also considering penalties, cash flow and consolidation of debt.

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