Andrew Meredith
One of the economic conundrums of the past year has been the great divergence in the Canadian and U.S. housing markets. While American home prices swooned in 2009, the Canadian market only stumbled before resuming its inexorable climb upward. As Barrie McKenna reported in The Globe and Mail recently, there are two schools of thought as to what's behind this discrepancy. One suggests that Canada, with its fiscally sound banks, simply avoided the bubble. The other, bruited by David Rosenberg-chief strategist at Toronto-based Gluskin Sheff + Associates Inc.-is more pessimistic. His assessment: The Canadian housing market is overvalued, in the range of 15% to 35%. In other words, we are dangerously close to bubbledom.
During the early days of the Great Recession, most commentators focused blame on two culprits: American banks-for underestimating the risk associated with their new-fangled financial instruments-and American consumers. The latter had overextended themselves, the thinking went, first taking on ridiculously large mortgages, and then using their houses as virtual ATMs to finance lavish lifestyles.
If our banks are solid, what of Canadian consumers? Are we so parsimonious-so virtuous-that we can avoid the leverage trap that ensnared so many Americans? In the numbers below, we explore this question. We picked a street in a new development in Toronto, and had our research team pull up buyers' mortgage information.What we were after was a sense of how homeowners finance their high-flying lives.
Here's a sample of what we dug up: John and Sarah purchased their detached house in February of 2007 for $1.25 million. Their mortgage rang in at just over $1 million (a five-year term, at 4.9%), with monthly payments of $5,811. In March, 2008, they secured a line of credit for $92,000 (prime plus 5%). A year later, they took out a second mortgage for $975,000 (another five-year term, at 3.8%).
So what to make of this? Are people taking on too much debt? Take a look and see what you think.
No.18 Purchased by Geoffrey (all names have been changed) in April, 2004 Paid: $1,440,059 Mortgage: $1,275,000 (five years, 0.24% below prime) Monthly payment: $6,555.17 In 2005, Geoffrey took out a second mortgage for $4 million (five years, prime plus 5%), secured by 200-plus acres of property north of Toronto.
No. 24 Purchased by Jin and Lei in January, 2004 Paid: $1,443,956 Mortgage: None
No. 52 Purchased by Isabelle and her husband in September, 2006 Paid: $1,200,894 Mortgage: $1,203,000 Terms: Payable on demand (rate unknown)
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No. 9 Purchased by Tanya in October, 2007 Paid: $1,638,358 Mortgage: $1,298,860 (three years, 5.25%) Monthly payment: $7,740 The same year, Tanya applied for a second mortgage of $36,140 (three years, 5.25%), adding $215 to her monthly payment
No. 17 Purchased by Dave and Chloe in January, 2004 Paid: $1,284,912 Mortgage: $300,000 (five years, 4.89%) In 2009, the couple took out a second mortgage for $600,000 ("on demand," prime plus 7%)
No. 37 Purchased by Rebecca and Domenic in December, 2006 Paid: $1,129,948 Mortgage: $730,000 (five years, 5.25%) In 2009, the couple took out a second mortgage for $500,000 ("on demand," prime plus 6%). A third mortgage was secured in November, 2009, for $580,000 ("on demand," terms unknown)
. Weigh in on whether you would stash some extra money into an RRSP, RESP or a TFSA.
Mortgages: Ask Rob Carrick