OTTAWA, Canada – At first thought American lenders might assume eliminating the mortgage deduction from income taxes would at least slow down currently brisk home sales in the U.S. But Canadians are used to that situation, and it doesn't seem to discourage them from becoming homeowners in impressive numbers. The nation's credit unions are getting their share – and perhaps a little more – of the resulting mortgage volume. For example, in 2004 Ontario credit unions saw their residential mortgage loans grow 9% over the previous year. That compared very favorably to most of the Big Five Canadian banks – Royal Bank of Canada up 6.8%, Toronto Dominion Bank down 2.2%, Canadian Imperial Bank of Commerce up 3.7%, Scotiabank up 12%, and Bank of Montreal up 8.3%. The latest government report from Statistics Canada shows that from June 2003 through May 2005, the latest figures posted, prices advanced in 17 of the 21 metropolitan areas surveyed. Still another report, this one from Canada Mortgage and Housing Corporation, suggests mortgage lending staffs might not want to schedule lengthy vacations during the rest of 2005. Home sales are expected to remain near record levels, with existing home sales at 455,900 units and new home sales at 433,700 units, also down only slightly. "Strong sales in 2005 will continue to foster sellers' market conditions," CMHC projects. "As a result, the rate of increase in existing home prices will moderate only slightly to 9 percent." CMHC expects certain provinces, such as British Columbia, to post an above average level of new home construction this year but decrease to 31,600 units in 2006. However, Credit Union Central of British Columbia chief economist Helmut Pastrick is more bullish. He forecasts new housing starts to reach 34,800 units during 2005 and actually climb next year to 37,000 units. Prices, he predicts, will also rise about 10% this year and 8% next year, resulting in an average sales price of $342,000 in 2006. He expects that expansion to be backed by low mortgage rates, rising in-migration, robust economic growth and improved consumer confidence. Just as the strong market in the United States has sparked alarm about speculation and flipping, Pastrick says that has become a concern in British Columbia and perhaps other areas such as Toronto and Calgary. "In British Columbia we've had a substantial run-up in prices over the past four years, and there is more and more talk in the media and in the industry about the possibility of a bubble," he says. "Certainly high levels of speculative activity is a very good sign of a potential or actual bubble. In British Columbia we have a somewhat unique history in that in the 1979 to 1981 period we had a very robust upturn in the housing market. When the correction occurred, due to punishingly high mortgage rates and a recession in much of the industrialized world, we saw a drop in housing prices of at least 30 percent." Now people are beginning to draw parallels, he says. However, hard data suggests a low portion, 4%, of homes are resold within six months. In 1981 the figure was over 20%. From 1986 to 1990, another period of brisk sales, quick turnarounds topped 10%. "It's not a major component of the market at this time, although if the market continues to post further gains – which I expect – one could also reasonably expect that investor speculative activity will also increase," Pastrick says. In addition to not being able to deduct mortgage payments from their tax bills, Canadian homebuyers also tend to opt for short-term mortgages. Most mortgages, while based on a twenty to twenty-five year amortization, are written for terms from three to five years. Variable-rate mortgages are also offered and one-year mortgages are available at even lower rates. Pastrick notes the housing market in British Columbia started its latest upswing later than some other areas, such as Ontario, where the boom may be maturing. Howard Bogach, CEO of Credit Union Central of Ontario, agreed there is a "bit of a concern" activity there may be nearing a peak. "Housing prices have continued to rise, there are still a lot of new starts, and the condo market – especially in urban centers – has been very, very strong. We're hearing the same rhetoric that's appearing in the U.S. about a bubble," he says. If anyone is worried, it could be landlords. As renters take advantage of low interest rates and abandon their condos, rental vacancies have increased. Is there a lot of speculation and flipping? Bogach recalls in the early 1980s when he was in Alberta, there was a great deal of that. "The scary thing was you would talk to people and discover they had more than one home," he remembers. "You wondered, `Who is living in these houses?' One of the aspects in Toronto is the average house price – and it's a pretty modest house – is in the mid-$300,000s. That doesn't leave you a lot of room to speculate without having a fair degree of cash. "On a conventional mortgage in Canada we would expect a 25 percent down payment, although there are ways to do homes with zero down payment, usually through some form of insured mortgage. Because of some of the economics, I'm not sure we have a large speculative side." There is a fair degree of securitization of mortgages through the secondary market, despite the fact with the typical term of five years or less lenders face lower risk than with a 25- or 30-year mortgage. On the other, every year or five years the homeowner must refinance or transfer the existing mortgage. With financial institutions constantly assuming each others paper, it's a "highly, highly competitive situation," Bogach says. "Mortgages have become highly commoditized. It's hard sometimes to sell the value-added services relationship you get at a credit union, especially on a big-ticket item where rates are very, very important." -

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