There is no shortage of negative financial headlines today. They attempt to scare and shock us with real estate numbers, interest rates, and economic crises. These headlines sell and take priority over positive, non-volatile, non-emotional content.
As a sophisticated investor, you need to recognize that these sensational headlines may be only part of the picture. Here is some information that doesn’t make the headlines, but it paints a more positive picture and provides perspective.
Canadian mortgages in arrears (homeowners who have gone 3 or more consecutive months without making a payment) have been and are extremely low. They are historically less than 0.5% (actually Canada’s current average sits at 0.29%, Ontario sits at 0.18%, with Alberta at 0.27%!) Even through the most recent couple of ‘financial crises’, there was no blip in this number.
This is a tiny fraction of the US statistic; however, common opinion leads us to believe otherwise. There are a number of fundamental differences between the two countries’ banking and mortgage lending systems. One difference is that most mortgages in the US are ‘non-recourse’, meaning you can walk away from your house and owe nothing beyond that asset’s worth. In Canada, you are liable for the entire debt, and this is a great incentive to do everything possible to make that mortgage payment.
Canadian mortgage lenders are prudent; their goal is not be stuck with a property. Banks are not in the property ownership and management business, so it is in their best interest to make sure borrowers can make their mortgage payments. Mortgage default insurance facilitates lenders to make more risk-based decisions, opening up the mortgage lending market to more consumers (including rental property, which is always viewed as more risky since it is assumed an owner will pay for their own housing first before covering the payment on a home they do not reside in). If a consumer falls into temporary financial hardship, there are assistance programs available from the mortgage insurers, with the goal of avoiding a default and lender having to take over the property.
Canadians with mortgages have significant equity in their home, averaging about 74% of the home’s value. In addition to that, a 2014 survey found that 16% of mortgage holders have increased their mortgage payments, and 16% made an additional lump sum payment in the last year. From the headlines, you would think an epidemic has swept across our country with low-equity home ownership being the norm.
Canadians, in general, are conservative with their money and the statistics show many are sitting on a healthy amount of wealth. Naturally, there is the demographic at the beginning stages of their home ownership journey who have lower equity. However, there a many mortgage regulations in place designed to qualify these applicants accordingly, along with mandatory mortgage default insurance for those with low downpayments.
There is much discussion today about how hard it is for first time homebuyers to qualify for a mortgage, due to these regulations which have become increasingly more strict, so it is plausible the government may realize the effects of their decisions and loosen up the reins in order to maintain balance in the housing market and economy.
Another statistic demonstrating that Canadians, overall, are conservative with their money is that 60% of Canadians pay off their credit card balance in full each month, avoiding credit card and interest payments altogether. The truth is, no matter how many rules and regulations are implemented, there will always be financially irresponsible people. The headlines like to focus on this group, and regulatory decisions appear to be swayed by these sentiments, lumping everyone into the same category, including savvy real estate investors who understand how to manage debt responsibly.
In conclusion, headlines are designed to sell. Not everything is perfect and positive all the time, but it certainly isn’t the constant doom and gloom we read about. The messages in the headlines are often inconsistent; one day something is up, and the next day it is down. A savvy investor knows to look beyond the headlines, not get swept up emotionally, dig deeper, filter out the irrelevant chatter and figure out what really applies to them.
(Reference sources: Canadian Mortgage and Housing Corporation, Canadian Association of Accredited Mortgage Professionals, Canada Bankers Association, Bank of Canada)