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	Subscribe Here - Canadian Wholesale Newsletter Committed to helping the Wholesale Industry in Canada!   Email Address subscribe unsubscribe  Wholesale Canada News - September 2010   Housing will be banks' next sore spot Canada’s housing market was a key source of strength that shielded the banks from the financial crisis but a flurry of recent warnings about a market bubble is raising concerns the vast mortgage holdings on bank balance sheets is about to become a millstone. The Canadian Centre for Policy Alternatives Tuesday released a study arguing that the red-hot residential real estate market in Toronto, Vancouver, Calgary and other cities is “an accident waiting to happen.” “Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble,” said the report by David Macdonald. The warning comes after a report from the Organization for Economic Co-operation and Development argued that bloated debt levels of Canadian households are a threat to the economy. The Canadian Association of Accredited Mortgage Professionals estimated earlier this year that about 357,000 mortgage holders are already struggling to make their payments and may not be able to afford higher rates. Not everyone is quite so gloomy. However, on balance experts say the market is headed for a correction, the only question being how low prices will fall. The challenge for the banks is that making home loans is an important profit driver and the biggest single asset class on their balance sheets. Banks can’t afford to see the business dry up, especially now as earnings from other businesses such as capital markets starts to slide. Canadian households have about $1-trillion of home loans outstanding, the latest statistics from the Bank of Canada show. Of that amount, about $495-billion is held by the chartered banks on their balance sheets. A further $300-billion of mortgages mostly issued by the banks has been made into mortgage-backed securities. The strength of the residential mortgage market “is why the Canadian banks have performed so well when all the global banks were failing,” said Peter Routledge, an analyst at National Bank Financial. Mr. Routledge said that despite their substantial debt burdens Canadian households have managed to meet their mortgage payments because, unlike the United States and parts of Europe, the Canadian economy has stayed relatively strong with healthy employment levels. As well, mortgage rates continue to be affordable. The problem is that with increasing signs that the global recovery is losing steam, the outlook for Canada is not as bright as it was just a few months ago and that’s raising fear that Canadian employment could take a hit. At the same time, the Bank of Canada has signalled it’s planning a rate hike later this year, though some economists are now saying the bank would be foolhardy to move. The high level of household debt suggests that the market is sensitive to changes and that it won’t take much — whether rate hikes or job losses — to cause a significant impact both on borrowers and house prices. The good news for the banks is that their riskiest mortgages are insured by the Canada Mortgage and Housing Corp. so even if there is a rise in default levels the federal government takes the loss. But, at the same time, they are highly motivated to prevent that from happening because borrowers who stop paying their mortgage typically abandon other obligations as well, including everything from car payments to lines of credit. And any spike in home foreclosures would probably spark a broad decline in prices, which in turn would affect the value of bank collateral. That’s a risk the banks have been watching for for some time. Late last year they persuaded the federal government to take steps, including tightening the rules around CMHC insurance. Meanwhile, all the banks have lifted mortgage rates from rock bottom levels seen in recent years. Ironically, the main reason the housing market got to where it is today is because of actions taken by the federal government in the wake of the crisis aimed at protecting Canada’s financial system. As liquidity dried up at banks around the world, the Bank of Canada cut key rates to near 0% and the government bought back billions of dollars of residential mortgages from the banks, allowing them to securitize billions more. That meant the banks had plenty of cash to take advantage of opportunities at a time when their global peers were failing or being taken over by regulators. It also created a huge incentive for the banks to grow their mortgage businesses, which they did. However, the unintended consequence is a housing market that appears to have gotten ahead of itself and that poses a threat to the broader economy.     BMO cuts mortgage rate to spur home buying Bank of Montreal has chopped its benchmark five-year mortgage rate, aggressively throwing its weight behind what many are calling an increasingly wobbly housing market. “It’s a great time to buy a home,” Martin Nel, a senior BMO official, said in news release announcing the change. He added that people who take advantage of the offer will benefit. “If ever there was a time to buy, it is now,” Mr. Nel said. The move which takes effect Thursday brings the bank’s key five-year rate to 3.59%, down from 3.79%, making it one of the lowest five-year rates ever offered by a Canadian bank, says industry newsletter Canadian Mortgage Trends. But some experts are already scratching their heads because of the aggressive tone of the announcement as well as the timing, given the recent spate of warnings about the uncertain state of the market, including one earlier this week from the Canadian Centre for Policy alternatives predicting an imminent collapse. When the big banks make mortgage rate changes they generally just disclose the new numbers without commenting on housing market conditions. If pressed, bank officials are usually quick to explain that the change in these consumer lending rates are merely a function of fluctuations in their own borrowing costs. “It’s a bit puzzling to me,” John Andrew, a professor at Queen’s University’s School of Urban and Regional Planning, said of the BMO announcement. “Perhaps they are concerned that the number of new customers will fall off precipitously.” Residential real estate prices have been in free-fall in the United States as well as many European countries in contrast to the Canadian market, which has been on a tear for a good part of the past decade with prices in many cities at record levels. But analysts worry that it’s only a matter of time before the Canadian housing market moves in the same direction, and they point to warning signs that have already appeared. Earlier this year Moody’s reported that debt to income levels of Canadian households is the highest ever and close to where they were in the United States before that market started to fall apart in 2007. The Bank of Canada has raised concerns that the high debt loads of Canadian consumers has made them vulnerable to changes in interest rates and potential deterioration of the economy. In a bid to crack down on what some described as reckless real estate speculation, the Federal Government brought in new regulations in the spring to make it harder for first-time buyers to qualify for government-backed mortgage insurance. Borrowers must now meet standards for a five-year fixed-rate mortgage, even if they want a shorter-term, variable-rate product. As the key measuring stick for many home buyers, a lower five-year mortgage rate will mean more people will qualify to buy more expensive homes than with a higher mortgage rate. The tougher rules had the desired effect. The recent imposition of the new harmonized sales tax in Ontario and British Columbia also impacted demand, and as a result the market cooled so much that industry insiders became worried it had gone too far. The housing market is important to the banks because residential mortgages make up the single biggest asset class on their balance sheets. There are nearly $1-trillion of home loans outstanding, according to the Bank of Canada, about half of which is held by the chartered banks. Read More:  Canada's budget officer won't see new mandate To get more news like this on a regular basis subscribe to the newsletter up above.        Free in Canada - Freebies Cash, Vacations, Lotteries, Samples, Products Baby Products, Cooking ware, Makeovers   Adding Paypal increases your website sales by 14% It's free, easy to sign-up and use.  Shopwholesale strongly recommends.  Adding Paypal to your site.  Many other free tools available! SIGN UP HERE NOW ! !         NEWS WHOLESALE CANADA
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