There's a revolution going on in Canada's housing market, one that is propping up prices and extending the boom.
More buyers are choosing mortgages with longer payback periods.
By stretching payments over 30 to 40 years (instead of the usual 25), they can enter the market sooner or buy a better property.
Mortgages with longer amortizations have caught on like a house on fire (pardon the pun).
"About 60 per cent of first-time buyers are opting for a 40-year mortgage," says Craig Alexander, deputy chief economist at TD Bank.
His explanation: Houses are now less affordable because prices have grown faster than household incomes.
"Prices have gone up 10 per cent a year between 2002 and 2007, while historically they have gone up only 4 to 5 per cent a year.
"If these longer amortization mortgages hadn't been around, the housing market would have cooled down a lot sooner."
There's a "huge adoption" of 40-year mortgages in Toronto, Calgary and Vancouver, where people stretch for affordability, says Catherine Adams, vice-president of home equity financing at Royal Bank of Canada. "I think it's given the housing market a boost and allowed prices to go up further than they would have otherwise."
The Canadian Association of Accredited Mortgage Professionals did a survey last fall that showed the product's appeal.
Mortgages with longer amortizations grew to 37 per cent of new home loans – and 9 per cent of outstanding mortgages.
"That's phenomenal, considering they have been around for only the last two to three years," says association president Jim Murphy.
Competition in mortgage insurance has accelerated new product development by lenders.
Canada Mortgage and Housing Corp., a federal government agency, used to have the market to itself.
Now it has three private-sector rivals from the United States (
Genworth Financial,
PMI Group Inc.,
AIG United Guaranty).
Another big U.S. firm (Mortgage Guaranty Insurance Corp.) has applied for a licence, Murphy says.
Is there too much innovation in lending? And is Canada headed down the same road as the United States?
That's the contention of Garth Turner, a Liberal MP and former business editor, who argues that lenders in Canada are flirting with a market collapse.
In his book, Greater Fool: The Troubled Future of Real Estate (Key Porter, $21.95) and his blog,
http://www.greaterfool.ca/, he says the net effect of 40-year mortgages is no different from U.S.
subprime mortgages.
"Both make buying easier and cheaper. Both lower the bar for loan qualifications. Both augment mortgage debt. Both sustain an overvalued market. Both lead to asset inflation.
"Will they both end badly?"
While 40-year mortgages may have extended Canada's real estate boom, most economists don't foresee an imminent U.S.-style bust.
"There's no evidence that house prices are set to decline in Canada," says Ted
Tsiakopoulos, a
CMHC market analyst in Toronto.
"Incomes are growing and we feel that's the most important factor that will support price growth."
The forces behind Canada's last housing crash in 1989 – high inflation, high interest rates and speculative buying – don't exist now.
In particular, says Alexander of TD Bank, you don't see house prices decline without significantly higher interest rates.
He predicts Canada's economy will slow until late 2009 and the Bank of Canada will cut rates by 1 to 1.5 percentage points.
"Falling interest rates are not consistent with the housing market running into major problems."
So, prepay your mortgage now if you can. Then, you'll have some equity to fall back on when interest rates go up again in about two years.
Ellen Roseman's column runs Wednesday, Saturday and Sunday in the Toronto Star. You can reach her at eroseman@thestar.ca by email.
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