Credit Junky Nightmare – Credit Cycles Effect on Housing Market (Part 2 of 3)
Changing credit conditions impacts the demand for real estate. If credit lending practices are loosened, it allows new participants to purchase real estate. The increased demand for real estate creates upward price pressure until the demand can be satiated.
Likewise, if credit lending practices are tightened, less participants can purchase real estate which reduces demand for real estate.
So how have credit conditions in Canada changed over the past couple years?
The following is a timeline of roll-outs of new CMHC products which demonstrates the rapid loosening of credit that occurred in 2006 through mid 2007:
- February 2006: CMHC to insure 30 year mortgages on a pilot basis
- June 2006: CMHC introduces 35 year mortgage and interest-only mortgage insurance
- December 2006: CMHC introduces insurance for 40 year mortgages
- September 2007: CMHC offers insurance for 100% financed investment properties
Recently, due to the turmoil in credit markets, the amount of subprime mortgages funded in Canada has dropped substantially. As an example, Xceed’s (Canadian subprime lender) funded mortgages have plummeted from $340.0 million to $65.7 million. This one lender has resulted in a quarter billion less financing for real estate in Canada over the same reporting period last year. Tightened lending standards helps explain why YoY sales volumes are down considerably.
In summary, credit conditions affect the demand for real estate, so it is prudent to pay attention to how it impacts the supply/demand balance.
