Interesting. I see Volcker's name come up now a lot. Do you have any idea what rate-rising environment in Canada will do to housing prices here? I'm thinking of my parents time, when they bought a house for 107K in Stoney Creek with a 10% mortgage. They bought, by the way, because they had watched the price of that house rise from about 30K a decade earlier to 149K and then back down.
When people buy houses the "cost" is the monthly payment. Anyone with a variable rate mortgage might see monthly payments rise. Or they might see the amortization extend. Or some combination of both. New buyers will need to afford higher payments too. In summary, the cost to service a mortgage will gradually rise. Mortgage rates are still relatively low (especially compared to when your parents bought), but today there may be more sensitivity to smaller increases because house prices are so high.
Canadian's can't walk away from their mortgages like Americans could in 2008. So Canadians will do their best to keep paying. But that could mean cutting back elsewhere...
Thanks! Interesting to think of the 1990s occuring again. I know a lot of my parents friends and family were washed out in more ways than one. Many people had multiple mortgages and had to let go of some of them. Some did walk away from their houses - not sure how. Wondering if you can explain that, too? Why can't we walk away from homes in Canada? Can't one declare bankruptcy?
It essentially comes down to recourse vs non-recourse loans. Some loans are backed by the asset and that's it. Recourse loans allow the lender to go after the borrowers other assets. Many states in the US enabled borrowers with underwater mortgages to simply mail their keys to the bank (aka jingle mail) and let the bank deal with the negative equity.
So mortgages in Canada are recourse loans. One can't walk away because the bank can go after other assets first. In the US this isn't the case so a person with wealth in other areas could walk away from a house with negative equity to save the rest of their portfolio?
OK. Makes sense. I'm still not sure that's better, though - i.e., the Canadian system. Banks can absorb negative equity better than individuals, one might think. For instance, if a couple with 2 houses, one rental, wants to sell one of them because the prices are diving and the carrying costs are increasing, they presumably have to eat the loss when they sell that rental, which would compromise the equity in their primary residence by the sounds of it. I don't even know how that would work since, from what I've heard, banks are less likely to refin in a down market. None of this sounds like a good situation for Canadian real estate or economy.
The 1990s were great in many ways, but not for the Canadian economy. Unemployment was double that in the US. It took years for real estate prices to retake the 1990-ish peak. The weak CAD and a strong US economy saved us by way of exports and direct investment.
Interesting. I see Volcker's name come up now a lot. Do you have any idea what rate-rising environment in Canada will do to housing prices here? I'm thinking of my parents time, when they bought a house for 107K in Stoney Creek with a 10% mortgage. They bought, by the way, because they had watched the price of that house rise from about 30K a decade earlier to 149K and then back down.
When people buy houses the "cost" is the monthly payment. Anyone with a variable rate mortgage might see monthly payments rise. Or they might see the amortization extend. Or some combination of both. New buyers will need to afford higher payments too. In summary, the cost to service a mortgage will gradually rise. Mortgage rates are still relatively low (especially compared to when your parents bought), but today there may be more sensitivity to smaller increases because house prices are so high.
Canadian's can't walk away from their mortgages like Americans could in 2008. So Canadians will do their best to keep paying. But that could mean cutting back elsewhere...
The 1990s is a good example of what could happen.
Thanks! Interesting to think of the 1990s occuring again. I know a lot of my parents friends and family were washed out in more ways than one. Many people had multiple mortgages and had to let go of some of them. Some did walk away from their houses - not sure how. Wondering if you can explain that, too? Why can't we walk away from homes in Canada? Can't one declare bankruptcy?
It essentially comes down to recourse vs non-recourse loans. Some loans are backed by the asset and that's it. Recourse loans allow the lender to go after the borrowers other assets. Many states in the US enabled borrowers with underwater mortgages to simply mail their keys to the bank (aka jingle mail) and let the bank deal with the negative equity.
I'm oversimplifying but that's the gist of it.
So mortgages in Canada are recourse loans. One can't walk away because the bank can go after other assets first. In the US this isn't the case so a person with wealth in other areas could walk away from a house with negative equity to save the rest of their portfolio?
It varies from state to state though. I also think it varies from province to province
OK. Makes sense. I'm still not sure that's better, though - i.e., the Canadian system. Banks can absorb negative equity better than individuals, one might think. For instance, if a couple with 2 houses, one rental, wants to sell one of them because the prices are diving and the carrying costs are increasing, they presumably have to eat the loss when they sell that rental, which would compromise the equity in their primary residence by the sounds of it. I don't even know how that would work since, from what I've heard, banks are less likely to refin in a down market. None of this sounds like a good situation for Canadian real estate or economy.
The 1990s were great in many ways, but not for the Canadian economy. Unemployment was double that in the US. It took years for real estate prices to retake the 1990-ish peak. The weak CAD and a strong US economy saved us by way of exports and direct investment.