There was an interesting report by Merrill Lynch that Canada could be facing a similar real estate/financial crash that the U.S is facing right now. The rationale being that Canadians have turned from being savers to spenders with an increasing net household deficit. While I agree that the real estate market in Canada is due for a healthy correction, will the correction lead to significant foreclosures, thus resulting in our banking system crashing?
What had me confused about the sheer number of people declaring foreclosure in the U.S, was WHY? In a nutshell, the reason is that people gave into the American Dream of owning a house without having the ability to afford it. The teaser mortgage rates that they were given would temporarily allow them to make their payments. While borrowers knew that eventually the mortgages rates (thus payments) would go higher, most expected that real estate would keep increasing, thus refinancing when they needed to.
What happened? The real estate market started getting more houses for sale than there were buyers, thus decreasing values. This lead to a chain reaction of borrowers not being able to refinance at the higher predicted price which in turn resulted in foreclosures due to the inability to make the mortgage payments. With a high number of foreclosures, the lenders now have a bunch of non performing debt on their books with few buyers out there. If you have enough upside down mortgages on the books, it can turn ugly pretty quick. This is why the big mortgage companies in the U.S are looking for either bankruptcy protection or government help.
So, back to the question at hand, could this real estate crash/foreclosure mess happen in Canada? I believe that home values can definitely decrease due to supply/demand factors, but I don’t believe that many Canadians depend on their home values or refinancing to make their next payment. In addition, there aren’t that many “teaser/subprime” mortgage products offered to Canadians.
What do you think? Do you think Canada could face what the U.S real estate/financial market is going through now?If you would like to read more articles like this, you can sign up for free my newsletter service below (we will not spam you).