Bubblicious mortgage deals, Canadian version
You can get some pretty good mortgage deals in Canada these days Today I got this drift via this intrusive banner advert from CIBC. Clearly CIBC wants you to see this advertisement.
The deal is 4.74 fixed with 2% cash back if you switch to CIBC. The company says:
Making the switch to a CIBC mortgage is easy and convenient. We’ll contact your current institution, complete all of the paperwork for you and transfer your existing mortgage for free — we don’t charge legal, appraisal or transfer-in fees.
I’m sure you can get great deals at other banks too – and without a whole lot of money down as I pointed out in an addendum to a post on Lehman Brothers a few weeks ago. TD was offering 5% cash back if you signed a deal with them.
What about this no money down deal from RBC? Take a look.
The full pdf is below.
Royal Bank of Canada No Money Down Mortgage Deals
100% financing. That gives you a sense of the mortgage frenzy. This reminds me of the sort of thing you might have seen in the U.S. or in Britain in 2006. Not quite like the HBOS deals for 125% loan to value in 2006, but bubblicious nonetheless.
Of course, the Canadian taxpayer will be on the hook if all of this goes horribly wrong:
Based on the frequency of reporting in the media, it seems that many people are increasingly worried that a housing bubble could develop in Canada. On Feb. 8 The Wall Street Journal even published an article suggesting that home sales and prices in Canada might have risen too quickly following the recent economic downturn and that this could create the conditions for a housing bubble similar to what occurred in the United States.
Policy makers worried about this should pay attention to a recently published study by the Fraser Institute which suggests that government intervention in the mortgage insurance market is unnecessarily exposing Canadian taxpayers to enormous financial liabilities in the event of a collapse in the housing market.
The extent of the potential taxpayer liability is staggering. The Canadian government is heavily exposed in the mortgage market because 43% of all residential mortgages (or roughly 90% of all insured residential mortgages) are backed by the government through the federally-owned Canada Mortgage and Housing Corporation (CMHC).
As of 2007, the total value of the mortgages insured directly by the CMHC was approximately $350-billion. More recent statistics estimate that CMHC currently has about $480-billion of insurance in force due to rising prices and sales.
This means that taxpayers are potentially on the hook for almost a half trillion dollars if the housing market were to collapse and require the government’s full backstop.
Recent events in the United States are a warning for Canadians about the disastrous effects of misguided public policies in mortgage and housing markets and the real exposure of taxpayers when governments guarantee mortgage financing.
–National Post, 10 Feb 2010
The great thing about the recession in Canada is that it cooled down an overheating market, especially for condos in places like Vancouver and Toronto. But, prices are marching higher again. See Vancouver Real Estate Anecdote Archive which I highlighted in the links on Sunday for anecdotes (ht Paul Kedrosky). This will end badly.
Living in Vancouver for the past four years, I have had the luck (misfortune?) of watching this bubble develop. For anyone who thinks we may not be in a bubble take a look at this.
https://www.crackshackormansion.com/
Prices here have become ridiculous. My family rent a two bedroom house that is supposedly worth $900,000 for $1000 per month. Even if we could qualify for a mortgage of that size, why would we even consider buying?
I am tipping that the new mortgage rules that came into effect yesterday will finally pop this bubble.
https://www.cbc.ca/canada/british-columbia/story/2010/04/19/mortgage-rules-april-19.html
Joel, thanks for the anecdote. That’s pretty insane. Let’s hope these rules help do the trick. They need to end these no down payment loans altogether, not just limit refinancing limits. 2008 turned out well for Canada because prices stabilized nicely. Things are looking worse now though – especially where you live!
At least Canada is trying to do something to prick the bubble, unlike their
US counterparts.
In a message dated 4/20/2010 12:15:38 P.M. Mountain Daylight Time,
writes:
There is no such thing in Vancouver as a $1000 rent for 2 bedroom house. Maybe for a 2 bedroom basement suite in a house. That should be pretty clear if you only check craigslist. There are plenty 900K crapshacks though. My experience is that a house that lists today for 900K would likely rent for around 2500/month.
Marko, I am aware that we have a steal of a deal, but it is no lie. $1025 per month for main level of a 2 bdr house. There is also a basement suite that rents for $750/month. We had a developer come to our front door 3 weeks ago offering $900,000 to build a duplex on the block.
The information contained in the Royal Bank PDF is from February 2008, new legislation was passed by the Canadian government regarding downpayments and forbidding “zero down” in October of 2008.
Yes, it is dated Feb 2008. Thank you for clarifying regarding zero down rules. I would note however that cash back allows one to effectively get zero down. This is what TD is doing 5% down 5% cash back for first time buyers. So I would argue zero down is still a problem.
Also, Brett I should point out that this document is still on RBC’s site and the loans are still being touted by brokers:
https://www.ontariomortgagesuperstore.com/rbc-mortgage-royal-bank-mortgage-rates
“RBC mortgage offers 4%, 5% and 7% cash back mortgages. This is a great product for first time home buyers with no down payment or for savvy investors. Royal bank mortgage offers this product on its 1-10 year fixed rate mortgages. Because this product is utilized by high-ratio and higher risk borrowers, the product usually carries a premium in terms of rate.”
Again, when house price inflation is as high as it is, people will find ways around the limitations.
To be fair to Canada…
1) Their subprime market never got going like the US. It only started in 2006 and then was promptly completed closed in 2008 when it blew up in the US.
2) Mortgages in Canada are full recourse. This means that banks can come after future income of Canadians if they walk away from the homes because it’s underwater. So they’ll be much less ‘jingle-mail’; which will stem any circle of prices being depressed as people walk away from their commitments.
3) And finally the Canadian government just this week w/c 19 April, 2010) introduced new tougher rules to qualify. The adverts in this post are old news now. The new rules are:
* You must qualify for 5 year fixed-term rate.
* If you refinance (use your home as a cash machine) the most you can take out is 90% the value of the home (vs previously 95%).
* Finally and most importantly you need 20% down now to qualify for the government insurance. So the government is no longer on the hook for high LTV mortgages.
Expect prices in Canada to soften as a result of these changes; but I don’t expect a crash.
The crazy prices in Vancouver can also be partly attributed to a lot of migration into the area. Statistics about incomes vs prices are irrelevant when the houses have been bought by rich immigrants bringing their wealth over to purchase.
There were ‘rich immigants’ supporting prices in Florida too.
People have been predicting a real estate crash in Vancouver since the 90s – as soon as the Olympics were over. Currently, new listings vs actual sales are now skyrocketing.
The immigration rate in Canada, even accounting for it being concentrated in a couple of cities, isn’t enough in proportion to the overall population unless they are buying several dozen properties each (in which case there’s likely some money-laundering going on).
The main driver recently has been either the first time home buyer – usually a young couple determined to get that dream home after already losing out to myriad bidding wars and sometimes with decent downpayment from mum and dad, or the upgrader – moving from condo to house.
Don’t forget the size of the cohort of baby-bomers’ kids who are now in their late 20s or early 30s and raised believing that renting is throwing away money. Most are too young to remember earlier housing busts or double-digit interest rates and don’t think it can happen.
Meanwhile twice in the past few weeks some of the major banks have been raising their five-year-rate.
Some good sources for US readers unfamiliar with Canada’s RE stupidity, particularly after witnessing how it ended in California, Vegas and Florida:
http://www.greaterfool.ca
https://whispersfromtheedgeoftherainforest.blogspot.com/
https://americacanada.blogspot.com/
While the Canadian government may be ‘doing something’ now it’s pretty much bolting the barn door after the horse is long gone.
Peter, prices in Canada haven’t reached the US bubble stage, thank goodness. And the regulatory changes are good. Moreover, Canadian banks have limits on leverage that were relaxed in the U.S. And Vancouver is definitely being buoyed by Asian money. All of that is positive. It won’t be enough to stop some people from getting hurt when prices revert to mean, but it will help things from getting worse.
Kind of spits in the eye of Canadian banks and politicians patting themselves on the back based on the premise that somehow the Canadian markets are more sounds. I thought they were enacting new legislation to slow this kind of behaviour…?
Ken,
They have done. We’ll just have to wait and see what kind of effect it has on the market. Once a bubble dynamic takes hold it requires a pretty firm regulatory and interest rate response to quell the animal spirits. This is one reason the Loonie is rising because people foresee rate increases as a likely response by June.