Housing here won’t be hurt
Ray Turchansky
Province
The U.S. mortgage crisis won’t affect Canada’s housing market directly, experts say. Photograph by : The Associated Press
EDMONTON — The havoc that sub-prime mortgage lending practices are wreaking on the U.S. housing industry won’t likely be an issue in Canadian housing, but there could be widespread economic fallout to Canadian investors.
“Last year I made fun about how they gave away money, and anybody would get these mortgages, these low-documentation loans,” said Brad Willock, senior portfolio manager with RBC Asset Management Inc., speaking to the Salloum Wealth Management Group.
Willock explained sub-prime and why it’s not a big issue in Canada.
“Sub-prime is a type of mortgage lent to somebody who is of low credit quality, either with low income or no credit history or they’ve defaulted on a loan in the past or they have no means of paying. There’s another category of mortgages called Alt-A, somewhat less sketchy, but still sketchy.
“In the States, the banks write the mortgage but don’t care if they get the money back because they don’t hold it any more: They package it up and off it goes.
“Most of the risk is held in the hands of hedge funds. These mortgages were put into baskets and sold off as a bond, typically a high-yielding bond, and most of the buyers were wealthy folks who put their money into hedge funds and pension plans.
“A lot of hedge funds bought insurance against defaults, and some are going to prosper because of it.
“But in Canada, the Royal Bank keeps your mortgage, the TD keeps your mortgage. You have to pay them or they’ll come and get you and take your house. Also, there are five major banks in Canada. In the U.S. there are 3,000.”
Benjamin Tal, senior economist with CIBC World Markets, says there will not be a direct effect on Canadian housing.
“We have a very boring market in Canada,” said Tal. “The sub-prime market is only five per cent of mortgages in Canada, and interest-only [with no principal paid down] is only one per cent, as opposed to 20 per cent in the U.S.”
Willock says the sub-prime situation will take several years to unwind and will eventually matter to Canadians.
“If $750 billion [US] isn’t getting repaid, banks would take a hit, interest rates would rise, that would put the U.S. most assuredly into a recession, and guess who’s still our biggest customer?”
© The Vancouver Province 2007
