Canada may not have the sizable subprime market of the U.S., but the engine behind the country's housing boom has been increasingly leveraged first-time buyers.
Legions of first-timers are adding years of extra mortgage payments so they can buy a house, or putting little or no money into a down payment, a Re/Max survey revealed yesterday. Nearly two-thirds of buyers in major centres now favour extended amortization periods of up to 40 years, while putting little or no money down was prevalent in 38 per cent of regional markets surveyed across Canada.
The country's real estate industry has played down any similarities to the U.S. when it comes to subprime borrowers. But as new segments of the Canadian population enter the market, the findings raise questions about what's been driving soaring house prices in recent years.
"The reason we think the market has been staying hotter much longer than anyone anticipated was because of these newer amortization mortgages," said Craig Alexander at Toronto-Dominion Bank.
"Because it really does change the affordability equation," Mr. Alexander said.
Canada's housing market has for years defied predictions of a slowdown. From 2002 to 2007, average home prices rose at about 10 per cent a year nationally, Mr. Alexander figures. A willingness to buy now and pay later explains much of the recent heat. Longer amortization mortgages "have had a very profound impact on the Canadian housing market since they were introduced" in 2006, he added.
Buying a house has become increasingly accessible. The flip side, though, is that more home buyers are now susceptible should the housing or labour markets weaken, or if interest rates change direction.
"We're more vulnerable than we were in the past, and I think that's just a factor of financial and mortgage innovation," said Adrienne Warren at Bank of Nova Scotia. "At the same time, it's a trade-off - more people are getting into home ownership earlier."
Like other economists, she doesn't see a major downturn in Canada's housing market. "I don't think there's a huge risk here ... these are new products and we don't have a track record yet, but I wouldn't be surprised if you see people paying down their debt far sooner than these 40-year amortization would suggest."
New home buyers are subject to the same credit criteria as any other buyer, she adds, a key factor that differentiates Canadian mortgage lending from U.S.-style subprime loans. Re/Max, for its part, says this new type of financing is driving the market.
"Innovative financing has become key to home ownership in today's environment," yesterday's report said. "Entry-level purchasers are adjusting their expectations by sacrificing size, location, and even long-term financial freedom to overcome challenges such as rising prices and serious supply issues."
Policy changes help explain why so many people have been entering the market. Ottawa extended the maximum amortization period to up to 40 years from 25 years in 2006. In the same year, Canada Mortgage and Housing Corp. began providing insurance to lenders for interest-only mortgages.
Mr. Alexander figures that as many as 70 per cent of first-time buyers are opting for longer amortizations. "It's a double-edged sword. It brings down your monthly payments. But it will actually double the amount of interest you pay over the lifetime of the loan."
The result is that people could pay tens of thousands more for their home when they could be saving for retirement or paying for their children's education, an independent financial adviser said. "I don't approve of it at all," said John DeGoey of Burgeonvest Securities in Toronto. "There are very, very few people who make the payments work in 40 years who could not, with a modest alteration of their lifestyle, make the payments in 25 years." Instead, many people are setting themselves back "massively" by still paying mortgages in the last 15 years of their working life.
"It's not just the young people and the first-time buyers that are coming to the banks asking for it. It might very well be the banks actively trying to foist it upon the first-time buyers," he added.