Why Sub Prime is not Likely to Affect Canada by Ravinder Tulsiani

Why Sub Prime is not Likely to Affect Canada

The Canadian housing market is better shaped and more professional than the US housing market. It is because, the housing market in Canada has very little of sub prime mortgage activity, comparatively limited and restricted speculative structure and also the housing stocks are not more than what is desired. The best thing about all this activity is that you have good amount of construction activity on the run in the Canadian housing market.

Moreover, as per the current statistics, the affordability costs in Canada's housing sector are also slated for increase, with Bank of Canada having slashed the rates by 150 basis points since December. The results shall be perceptible in the form of contraction of mortgage spreads and house price gains coming down.

The sub-prime mortgage market in Canada accounts for about 5% of outstanding mortgages, while, in the United States, sub-prime mortgages account for roughly 14% of the outstanding mortgage market. Speculative investing is also much tamer in Canada. Investor-owned mortgages account for roughly
2% of all mortgages in Canada compared to about 10% in the United States and the United Kingdom.

The Government of Canada has also recently taken action by proclaiming that it is all ready to purchase a maximum of $25 billion in pooled mortgage loans from various financial institutions operating in Canada, via reverse auctions. This is based on the research taken by Canadian Mortgage and Housing Corporation (CMHC).

In this manner, the Canadian lenders will have the opportunity to get away with their loan debts in balance sheets for hard cash during imbalanced liquidity. The Government's risk in all this is practically nothing, and moreover, the pooled mortgage loans are limited to ones insured by CMHC, and all the pooled mortgage loans are prime quality loans.

The entire mortgage system is expected to do well, primarily due to streamlined auction process and lower cost borrowings of Government of Canada. These will enough of credit for both, the government as well as banking sector in Canada.

On Oct 16, 2008, the first $5 billion worth of mortgage pool auctions were organized, and on this occasion, the rate average paid by Canadian banks was 132 basis points, which was above the cost of funding for the government of Canada. Moreover, the Canadian banks borrowing rate was 230 basis points.

This clearly showed positive swing in the transaction process, and as the result, the financial institutions received finances at low interest rates much lower than available through normal credit channels. Baring a few financial institutions in Canada, which have incurred losses due to credit crisis, the overall scenario looks healthy and workable altogether. This is the basis of sound Canadian financial system.

About the Author

Ravinder Tulsiani is a published author who has written about personal finance, real estate, self-help and online marketing.