Dear all,

We're looking for people's views on whether the developing sub-prime lending crisis in the USA is likely to spill over to Canada (and beyond) and if not, why not. Our interest comes from the fact that we have just agreed a sale on our UK property and are considering making an offer on a property in Canada (Okotoks) but ever the wary ones, we are trying to assess the risk of a house-price crash the moment we sign on the dotted line.

Relevant wikipedia URL refers...
http://en.wikipedia.org/wiki/Sub-prime_lending

All views welcome.

The GTs

The sub prime Mortgage market represents less than 1% of all mortgages, a lot of noise, by September it will have blown over.

Credit will be harder to get, few badly managed hedge Funds may close, focus on the economic fundamentals which are high employment and low inflation.

Canada is not the US,lenders here tend to be more astute.

Greenback may weaken further, Bernanke may have to lower rates.

I'm a sub-prime debtor in Canada. I'll try not to default.

Thanks for initial replies. Any other views supporting or otherwise, Howard's analysis?

The GTs

I too think it's a storm in a teacup. However, I'm only saying that, imo the sub-prime issue will not lead to a collapse in Canadian house prices. That's not to say that they won't fall for other reasons. I think Ontario is experiencing a bubble and Alberta's always had a boom/bust economy. I don't think anyone would be surprised if houses in Alberta rose or fell in value by a half over the next five years.

Credit will be much harder to obtain that is the one certainty, which could cause problems for the UK house market. However UK inflation data came in surprisingly weak this morning making it harder for the Bank of England to justify the another rate hike.

Much of the boom in the Canadian economy has come from the increase in commodity prices, not just oil. This shows no sign of waning yet, since a lot of this is driven by the far east, China in particular. Therefore i believe the Canadian economy is in a much better shape than the US, and will continue to do so. Also enquiries i have made in mortgages in Canada they appear a damn site stricter on lending requirements than the UK, and certainly not as exposed to the NINJA (no income no job allowances) mortgages that got accepted in the US.

I don't believe that this will cause a collapse in Canadian house prices. One of the reasons for the sub-prime will is simular to the UK i the late 80's, is house prices have been falling steadily there for a while, at the same time rates have been going up. People now left with little choice, can't meet increased repayments and house market is pants, so they are having to foreclose.

Chris

I cant see it much affecting the canadian housing market, but some of the larger canadian banks are quite exposed as sub prime lenders in the US, so its not doing their stock price (or my RRSPs) a lot of good.

It wouldn't surprise me but I think it'll take longer than five years this time, closer to ten.

Agree. A slowdown in the US economy (for whatever reason) will not be great news for Canadian stock markets and the economy generally but I would have thought a house-price crash in the UK would be MUCH more likely than in Canada. Canadian homeowners are generally not overstreatched unlike their UK (and some US) counterparts. The banks use a rule to calculate affordability of not more than one third of gross income to be spent on housing costs (which includes mortgage, property taxes, heating costs etc) which is a much more conservative lending policy than is being used in the UK right now. So even with interest rate rises, affordability will not become a serious issue for the majority of Canadians (obviously there are isolated areas where there are exceptions. Homes in Canada are generally still very affordable comparred to the UK.

Thanks to all.

Clearly, no-one can be sure of what the future holds but there are a number of well reasoned arguments in the above that have given the GTs some comfort/re-assurance and we are grateful for that.

Any other views, of course, gratefully received.

The GTs

GT's,

I am actually a trader for a Hedge Fund trading the futures markets that have been so wildly effected the last couple of weeks due to the sub-prime mess. This has been going on about a month, Thursday and Friday were the busiest days on the back of it however things appear to be settling back to normal now. It is usually the case that once the News Networks pick up on chaos in the markets, then the crisis is over. It appears to be the case at the moment.

As a number of people have pointed out there are more reasons for the UK housing market to collapse than the Canadian one.


Chris

Thanks - great to get a view from someone close to the heat of this situation...maybe we are exiting the UK housing market at the right time then! We were fearing the market had gone quiet on us, but we agreed a sale at asking price within 5 days of going on the market.

While I agree with the general belief that the UK housing market is in a far worse state than the Canadian market and will fall much further (though Alberta will probably at least halve if and when the commodity bubble bursts), I have to disagree about the sub-prime lending problems. The central banks injected quarter of a trillion dollars of cash into the markets a few days ago due to liquidity problems created by the collapse of these bonds, and that's not something they do for a minor problem.

For several years now mortgage companies have lent vast amounts of money to people who can't afford to pay it back and then sold those loans on to anyone who would take them so they don't carry the risk. Who even knows where that 'financial toxic waste' has ended up?

I would think the UK market would be more at risk especially as there is quite a lot Sub Prime lending combined with a lot of Self Cert with inflated incomes, and with many people coming out of nice little 4% Fixed rates, would mean that there will be more repossions and missed payments.

Latest reports show that repo is already up 30% since this time last year, I don't know the Canadian market but unless this is the trend there I wouldn't be to concerned.


Regards
DANNY

Mark, yes they injected that funding however it was all on short term refi, much of the ECB's was 3 day refi, meaning expired Monday. Today's refi from ECB was back to normal standards and the Fed Reserve was dramatically reduced from last week, the central banks have done their jobs of underpining the markets in time of potential crisis being a provider of liquidity. As far as i can see this crisis has pretty much been averted, there are still losses that will come out of the woodwork, many will be huge and lessons will be learnt.

In many peoples opinions the stock markets have been hugely overbrought for sometime, this was a massive opportunity for the mother of all corrections and we are still between 5%-10% up on the year in most global markets. European markets have only retraced to levels seen in May and US markets are back to Aprils levels, that isn't a disaster.

Chris