The Macro-Dynamics of the US and the Canadian Housing Markets: An Analytical Comparison

This article has a look at three key fundamental questions: (1)-Would the us housing marketplace face any change given what is happening in the usa and global economy? (2)-As believed by some pundits, would the Canadian economy undergo any serious a static correction? (3)-What are the key macroeconomic factors which impact the Canadian and the US housing markets? And using this framework what prophecy can we make both for short and long term trends of real estate markets?

The us Housing marketplace: Its Development from Crisis (2007-2008) to provide:

The us housing bubble was made by “Steroids Banking” using “Securitization” process and taking advantage of low interest rates and massive inflow of investment money from abroad. The housing prices in most regions almost doubled 2001 to 2006; and subprime lending increased astronomically. The private Mortgage banks were applying their creativity and avarice in designing highly risky esoteric mortgage products using the “Securitization” process.

What is “Securitization”? Quite simply this is packaging of mortgages (including subprime) into structured products (Mortgage backed sec, Collateralized debt obligations). The manufacturing mortgage bank then removes these esoteric products from its balance sheets to reduce any risks and sells these products to institutional investors using SIV (Structured investment vehicles). The buyers of these products erroneously assumed that the underlying mortgages of these sec were “safe collateral” given upward trending housing marketplace. However, when subprime mortgages defaulted and housing marketplace begun to sink, these structured products built around defaulting mortgages chop down sharply in value, thereby freezing the entire global credit system. Added to this chaos was dilution of commercial paper because of potential default of big lending institutions. The global financial system was under duress. Ironically, the Credit default swaps, which mean to insure against default of these mortgages flattened under their own weight, thereby reinforcing the Credit crisis. The us Treasury and the Given intervened and being injected trillions of dollars to save the collapsing US Housing and Banking system.

This crisis is a classic example of “Moral Hazard” issue. Who was responsible for over-leveraging the machine beyond its buoyancy point? Technically the Mortgage banks had packaged the mortgages and given to the risks to the institutional investors. The institutional investors made the wrong premiss that the US housing marketplace will move North forever. The Given and other institutions did not have a proper regulatory-monitoring structure as imagined in the BASEL guidelines to prevent such over-leveraging. Nobody knew that will be responsible if the edifice collapses. Worst of all, the institutional investors assumed mistakenly that the “Credit default swaps” (CDS) instruments would work miracles; and bail out defaulting mortgages. This is known as Meaning risk to safety problem. Ultimately everybody was looking forward to the Given and the Treasury to bail out the global financial system from reaching the doomsday.

The us Housing marketplace in the aftermath of Crisis:

The “Mortgage Delinquency Rate (MDR)” is a key metric that speaks of the real aftereffects of the US housing crisis (2007-2008). It measures the percentage change in delinquency of residential loans. In August 2007, the MDR was 2. 17% and reached its highest level in 03 2011 at 11. 36%. It retrieved back to 08 levels at 10. 4% recently. MDR is a key lagging indicator that demonstrates economic difficulties. Another key metric reflecting nys of housing health in the usa is the S&P/Case Shiller Home Price Listing. This is an listing reflecting change in housing prices of 20 (and 10) key US places. The home prices in April 2012 for 20-city grp composite have reached the amount existing in the start of 2003. In April 2012, the home prices have declined about 34-35% from its peak level in 2006.

The main reason for a flat US housing marketplace as verified from the MDR data is a fragile labor market. Slow job growth rate is due to weak consumer spending, which is the 70% part of real GDP and key driver of job creation in the usa. Consumer spending is directly related to job growth rate, the saving rate and the consumer confidence. In an uncertain environment, spending falls and the US dollar and saving rate increases. Although savings are recycled by the intermediaries as investments for businesses, this does not necessarily translate onto investment spending and GDP growth. Companies in a risky environment try to trim their balance sheets by settling their debts, a process called as deleveraging. They don’t want to burden their balance sheets by borrowing from banks. This deleveraging process decelerates the quality of investment throughout the market thereby indirectly moderating the job growth rate. Deleveraging also runs counterproductive to low interest rates and impedes growth in jobs and therefore fast recovery of real estate prices.

Why the Canadian housing marketplace is not positiioned for a serious a static correction?

The Canadian Mortgage system is better quality and conservative than the one existing in the usa. First of all, the Canadian subprime market is only 5% of total outstanding mortgages whereas during its peak years 2004-2006, the us subprime market captured 25% of total outstanding US mortgages. The Canadian mortgage system executes better risk management tools including limited contact with securitization and tight lending practices backed by insurance mortgage. The recent changes in the Mortgage lending have further tightened the belts to avoid any risks to healthy housing in The us.

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