Should We Worry About a US-Style Housing Meltdown?

According to leading economist Benjamin Tal, in the latest CIBC Consumer Watch report, the Canadian housing market should not be compared to its counterpart in the United States for the two following main reasons:

1) Adjusted Rate Mortgages Don’t Exist in Canada

While the 30-year fixed rate mortgage has long been the U.S. standard, 80% of new mortgages in the U.S. went for an adjusted rate mortgage leading up to the crash. Those mortgages had teaser rates for two to three years that were almost 4.25 percentage points below prevailing rates. So when the 2 years was up, the rates jumped to unaffordable levels.

2) Low percentage of Homeowners in Mortgage Arrears

He says the Canadian market has room for a soft landing which is what Australia experienced recently. “They demonstrated there is such a thing as a soft landing, interest rates went up and prices went down by 7% to 8%.”

So why are we so obsessed with comparing ourselves to the U.S.? Mr. Tal says it’s normal. “It makes sense because it happened in the U.S. and everybody was talking about it and we are going through a significant increase in house prices. I can understand why people do it but it should be based on fact.”

Read the complete report here.

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