Liberal MP and well known financial author Garth Turner recently wrote an article sounding the alarm on the Canadian Real Estate industry. He is actually predicting negative amortization (where you owe more on your house then what it is worth) in Canada within the next 18 to 24 months.
Strong words? Yes. Better question is he right? Well let’s look at his main argument. He says that the bulk of the recent boom in Real Estate in the past couple of years is because of 40 year amortizations. Of course by taking a 40 year amortization you get VERY little principal reduction for the first long part of your mortgage. That is right.
Consider this, if you put 5% down on a property and then add back the CMHC premium you are essentially 100% financing your home from the day you move in you have no equity. Now consider the possibility that the real estate market drops 10-15% in the next year or so, which is a real possibility in some regions of Canada, bingo you have negative amortization. So on that he is right it could certainly happen to many borrowers in Canada.
However, let’s look at the flipside, someone I respect highly recently said to me “people need to stop overly worrying about their paper loss and only worry about their real losses”. This is true, let’s remember that a mortgage is a long term commitment, and therefore your home as shelter is obviously necessary and is also a long term investment. As long as you are not a speculator or flipper then you can ride out this storm and long term you will be fine. This situation still beats out renting in my opinion.
I have to say a couple things that Mr. Turner had in his article was grossly inaccurate, and makes me wonder why some as accomplished as he is did not do more fact checking.
- “Canadian Mortgage lenders are no longer discounting mortgage rates”
Not True. Canadian banks are absolutely still discounting rates, they are however artificially pushing rates higher by increasing their spreads over the past six months as I have reported before.
2. “Shaky lending practices that coloured the US Sub prime crisis are now creeping into Canada”
This is ludicrous, Canadian sub prime mortgage business is basically over, there are basically no lenders left, and those that are have significantly tightened up their underwriting standards, and that is the facts from the street Garth.
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