One Toronto-based business school professor is sounding the alarm for high ratio homebuyers.
Schulich School of Business Professor Moshe A. Milevsky argues in his Financial Post column that, as a group, Canadians who purchase with a high ratio mortgage are, as a group, the most at-risk financially.
According to Milevsky, most of these homebuyers are not only unable to save money – they are overleveraging themselves by taking on additional credit.
“These 1.8 million households are taking a (1.) highly leveraged bet on the continued appreciation of housing, and (2.) aren’t willing to reduce their discretionary consumption to account for the new risks on their balance sheets,” Milevsky writes. “Look carefully, they are actually saving -13% (dissaving 13 per cent) of their disposable income.”
High ratio mortgages are a growing chunk of business for many mortgage brokers.
According to CIBC World Markets data, released in late 2014, the value of alternative lender loans grew by 25 per cent over the course of the year.
And with CMHC recently hiking its insurance premiums by 45 basis points to 3.6 per cent for those mortgages with less than a 10 per cent down payment, many high ratio clients will have more to pay each month.
“What really alarms me is what happens to these high ratio mortgage buyers and their spending after they have finally closed the deal and moved into their dream house,” Milevsky writes. “To be honest, I’m not sure they realize what a “risk pool” they have stepped into.”
Milevsky also looks to dispel the idea that a house is a proper substitute for a savings account.
“The amount by which housing prices would have to appreciate over the next 10 to 15 years to justify negative savings rates — and still leave a decent liquid nest egg for retirement – is staggering,” he writes. “Personally, I can’t get the math to work out even in the shallow (i.e. small mortgage) end of the risk pool, let alone the deep (i.e. big mortgage) end.
“And, worst case scenario, if real estate disappoints and/or interest rates swell, just when it comes time to renew your mortgage in three to five years, well, I guess these 1.8 million Canadian families will learn what it’s like to run their house like a hedge fund.”
According to Milevsky, most of these homebuyers are not only unable to save money – they are overleveraging themselves by taking on additional credit.
“These 1.8 million households are taking a (1.) highly leveraged bet on the continued appreciation of housing, and (2.) aren’t willing to reduce their discretionary consumption to account for the new risks on their balance sheets,” Milevsky writes. “Look carefully, they are actually saving -13% (dissaving 13 per cent) of their disposable income.”
High ratio mortgages are a growing chunk of business for many mortgage brokers.
According to CIBC World Markets data, released in late 2014, the value of alternative lender loans grew by 25 per cent over the course of the year.
And with CMHC recently hiking its insurance premiums by 45 basis points to 3.6 per cent for those mortgages with less than a 10 per cent down payment, many high ratio clients will have more to pay each month.
“What really alarms me is what happens to these high ratio mortgage buyers and their spending after they have finally closed the deal and moved into their dream house,” Milevsky writes. “To be honest, I’m not sure they realize what a “risk pool” they have stepped into.”
Milevsky also looks to dispel the idea that a house is a proper substitute for a savings account.
“The amount by which housing prices would have to appreciate over the next 10 to 15 years to justify negative savings rates — and still leave a decent liquid nest egg for retirement – is staggering,” he writes. “Personally, I can’t get the math to work out even in the shallow (i.e. small mortgage) end of the risk pool, let alone the deep (i.e. big mortgage) end.
“And, worst case scenario, if real estate disappoints and/or interest rates swell, just when it comes time to renew your mortgage in three to five years, well, I guess these 1.8 million Canadian families will learn what it’s like to run their house like a hedge fund.”
