With the recent mortgage meltdown that is happening in the United States many here in Canada are keeping a close eye on the real estate market for signs of what is to come. This has made many real estate experts divided as to what the future holds for the Canadian real estate market. Are we headed down the same path as the U.S.?
Well despite all the research and market watching the answer to that is not as simple as you might think. Real estate experts are basically in one of two camps. Those who believe we will weather the storm of any effects the U.S. housing crisis might have on the Canadian market, and those who believe we are following the United States right down the same path as them.
In a recent interview with CTV news Ted Tsiakopoulos, Ontario regional economist for the Canada Mortgage and Housing Corporation, painting an optimistic view future of the Canadian real estate market. Mr. Tsiakopoulos gave three reasons why he felt that Canada will not see the same type of mortgage crisis as in the United States.
For one he believes that housing prices in Canada have grown steadily and in a sustainable way. Second the number of people that are in mortgage arrears are at a low level which gives the impression that Canadian lending institutions have been more prudent in their lending practices than their U.S. counterparts. And third that the overall fundamentals of the Canadian economy remain healthy.
While the Royal Bank of Canada does not feel totally optimistic of the further of real estate in Canada, citing the cost of home ownership is at its highest levels since 1990, they do feel that going forward there will be improved affordability across all Canadian real estate markets. Mortgage rates are falling and a cooler market should slow price increases.
Not everyone, however, shares this rosy view of the future. Ontario MP, and real estate expert, Garth Turner is of the theory that all of the pieces are in place for the same type of real estate collapse, that is occurring on the United States, to happen in Canada. He points to the rise in housing prices, which have doubled in the last five years , as not being reasonable. You would expect that in a normal real estate market as the price of a home increases over time so do household incomes. However household income levels have not kept pace with rising prices and have stayed essentially flat.
This has lead the major lending institutions to introduce the 40 year amortization mortgage. This is almost double the 25 year amortization period that the majority of home buyers have been used to. Having a longer amortization period reduces your monthly payments but at the cost of taking longer to paying down that debt and paying more in interest over the life of the mortgage.
In order to protect themselves home buyers should always look at all factors and costs before signing on the dotted line. It can be very tempting to buy the larger home that may have normally been out of their price range. However a lower monthly fee due to a longer term mortgage may give buyers a false sense of affordability. After all the purpose of buying real estate is to build equity and not to pay rent to the banks.
Veronica Key is residential real estate professional specializing in real estate in Toronto with over 18 years of experience. Feel free to contact Veronica for more information on the Toronto residential real estate market.
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