Sub-Prime Gloom Won’t Last Forever
Canada’s sub-prime market will experience more blows in the coming months as a result of the US credit crunch, but the effects won’t be permanent, predicts Ben Tal, senior economist with CIBC World Markets.
In an interview with CMP, Tal admits the US market’s effect on Canada was greater than he initially predicted but, because the issues facing Canadian lenders are sparked by panic, the situation will settle down within six to eight months.
“Six months from now, the sun will rise on the US market. It’s not that the sub-prime problems will disappear, but the risk and the fear of the market will disappear and common sense will prevail,” he says. “And at this point, people will look at the fundamentals of the Canadian market and realize that it’s not even close to what we’ve seen in the US in terms of the types of mortgages issued to sub-prime borrowers in Canada.”
Tal says there is still plenty of potential for growth in Canada’s sub-prime market and, although it may stall in the coming months, the market is still on target to grow by approximately 10-15% in the coming years.
The US crisis will probably leave some permanent scars on Canada’s sub-prime arena including more expensive mortgages due to the repricing of risk but this might actually be a blessing in disguise, he says.
“We probably won’t see teaser rates,” he says. “Maybe if there wasn’t a crisis in the US, they would have caught fire here as well.”
While Tal says tying a home purchase to the state of the housing market isn’t usually a wise decision, he says borrowers looking to purchase a sub-prime mortgage will be better off seven or eight months from now.
“Sub-prime borrowers will still be able to finance their debts, but down the road the situation will be better,” he says.
So really it’s a matter of waiting out the storm, and understanding that this too shall blow over…
Jared & Rebecca Chamberlain
Article Source: November 2007 (re-printed from Canadian Mortgage Professional magazine)