Muslim Mortgages – An Opportunity for Investors and Islam

The question facing money-lenders who recognize the huge purchasing power of one of the most rapidly growing religions in Canada – Muslims – is, how do you lend money to someone whose religious beliefs ban the creation of money by money. “
Not unlike the Christian faith, Islamic law takes a dim view of usury. In the Islamic world, the charging or paying of interest is equated to usury. So, a conventional loan or mortgage would violate the teachings of the Koran. On the other hand, the Koran does allow money to be used in trading or investing, to generate a profit. Specifically, Islamic beliefs allow for investment based on “partnerships,” in which risk and profit are shared by the parties.
For the past six years, United Kingdom banks have been offering a form of Muslim mortgage, based on two Islamic principles of Ijara and Mudaraba.
Canada and the USA have entered the Islamic mortgage market slowly; a surprise given that the number of Muslims in Canada in 2006 was estimated at 783,700, and expected to grow by over 160% by 2017.
Indeed, Muslim mortgages have been offered by one small Ontario company since 2007. That company claims to have a 5,000-person waiting list. It is difficult to dispute or challenge that claim, given that 23% of Canadian Muslims call Ontario “home.”
Also in 2007, the Bank of Nova Scotia and the Toronto Dominion Bank began active exploration of the viability of providing mortgages that meet the requirements of those of the Islamic faith. In 2010, the Assiniboine Credit Union in Winnipeg began offering its version of the Muslim mortgage. It is too soon to gauge how well these products will be received.
A major impediment to the success of the mortgage concept is the CMHC insurance that is required on most home loans with less than 25% equity. A study commissioned by the Canada Mortgage & Housing Corporation in 2007, and released this January, states emphatically, “CMHC Insurance business has no plans to insure Shari'a mortgages.” It goes on to say that “(there is) little empirical evidence based on a sound methodology assumptions exists to accurately project what portion of the Canadian population would be interested in [using] Shari'a-compliant financing."
Even some Islamic leaders are speaking out against the mortgage concept. Tarek Fatah, founder of the Muslim Canadian Congress, describes Muslim mortgages as “the biggest con job ever.”
The Muslim mortgage seems, on the surface, to be a reasonable adaptation of existing lending to meet the reasonable religious beliefs of a significant religious group in Canada.
The Islamic principle of Ijarah is similar to Western-style lease financing concept. Under this proposal, the bank would buy the property for a customer, and then lease it back over a period of time. A similar arrangement --- Ijara-wa-Iqtina – allows the customer to buy the home at the end of the contract. These two ideas are almost indistinguishable from a conventional equipment or vehicle lease.
Mudaraba provides financing where both the bank and client share the risk if the property loses value, but share the profits if values increase. The bank, however, will not charge a handling fee unless a profit is achieved.
Murabaha involves the bank buying the home and selling it to the customer on a deferred basis.
CMHC has declared that the Shari’a-based loans are legal, yet still declines to adapt its regulations to accommodate the desires of the Islamic community. Without CMHC backing, it becomes less likely that larger banking institutions will risk financing these investments without much higher interest rates. This leaves the market to credit unions and smaller, closed investment houses that focus on such niche markets (although a market that is almost 2.8% of Canada’s population is hardly a “niche”).

Toronto Housing Value Great for Buyers & Sellers

Value has little to do with price. Media reports that “Toronto’s house values have skyrocketed” could as easily be seen as a positive indication of the significance of the city as an indication that price has risen.
While the media consistently ranks Toronto, Vancouver, Calgary and Edmonton among Canada’s most pricey housing markets, it fails to add the corollary that those markets lead the way in price because they are the areas that have the most to offer in terms of home ownership, convenience and lifestyle.
While no reporter or commentator would suggest that a Lada could be compared favourably to a Lexus in any other category other than purchase price, the most popular criticisms of Toronto’s real estate market versus other locations across Canada involve little more than a comparison of that price difference.
Real value is derived from price measured against benefit. Commercial value, and, in particular, real estate value is based on market dynamics and competitive pricing, and has little relationship to personal value.
Often slammed sarcastically as “the centre of the universe” by other Canadian communities, Toronto, in fact, has earned the reputation as the centre of the Canadian universe. That reputation derives from the immense benefits that Toronto offers to its residents, and to newcomers.
One of the contributors to rising home prices is rising demand, fuelled, in large part, by the influx of people from across Canada, and the in-migration (and immigration) of people from other nations. While Canada holds front-runner status among western & democratic nations for ratios of immigrants, Toronto is a real Canadian leader in attracting people from all corners of the country and globe. Do those people yearn to live here because it is an average city, or because it draws people like a magnet with its diversity of opportunity – employment, economic, social, educational, athletic and cultural?
As a westerner, I am proud of my rural, pioneer-like roots, and of the opportunities within my own region of the country. Our housing prices are among the lowest in Canada. Yet, if I am asked for an honest opinion, as to the value of housing here versus Toronto (not price), I must confess that there is no fair comparison.
In recent years, Toronto and southern Ontario have experienced an economic challenge that has seen their relative strength & influence across Canada diminish. Economic strength in Alberta and British Columbia has impacted on the Ontario position in Canada. Yet, Toronto still offers the best long-term potential, with its location among a host of influential cities, communities and regions. So, relative to Canada`s western cities, Toronto`s real estate market has waned. But, when considering the advantages of home ownership in this city, the prospects of newcomers to the city and upward mobility of locals, and the variety of housing stock available, this market still has great value, in spite of increasing prices.
In fact, Torontonians should take pride in its rankings as a city with a ``skyrocketing value of housing.” So long as value means worth, rather than solely being based on price, Toronto should encourage the national media to promote the city as a valuable place in which to live.

Heart Rules Head with Most Purchases

We walk onto a car lot, and the first vehicle to which we gravitate is the most attractive, the most powerful, the biggest, or the most luxurious. We set out to buy new household appliances, and the ones that catch our eye are the shiniest, the biggest, or the ones with the most gadgets. The same draw applies to our purchase of new shoes, new cell phones, new computers, and so on. It is understandable, then, that most home buyers look first at the most attractive home, with the amenities that appeal to us, rather than the practical, logical choice.
Neuroscientist Antonio Damasio suggests that we, indeed, are living an illusion of conscious choice, since our subconscious directs our actions first, and the emotions stem from our subconscious. In other words, for the most part, we make emotional decisions and then, perhaps, choose to justify them with a logical argument.
But emotional choice when buying a home may be the wrong approach, in spite of the urge to justify it by saying to ourselves, “I am going to be living here for many years, so I want something that I thoroughly enjoy.”
Yes, it is true that if we don’t like something, we will find fault with it regardless of its practical value. Think of taxes! Without them we would be denied many of our social pleasures, but there are very few of us that look for ways to pay more tax.
Emotion is often equated with irrationality. Unfairly, I might add. Logic can be irrational, too. The most secure home is the eight-by-eight isolation cell in a prison, with guaranteed meals, no repairs, and a perpetual “roof over your head.” No one rationally would choose such accommodations.
Home buying requires a balance of emotion and logic. One should look at buying a home much like operating or purchasing a business, balancing the need for something a person enjoys with something that is economically viable. You may love large spiral staircases, but if you are approaching elder years, consider that, in a few years, those beautiful stairs may be a curse, as you attempt to climb the expanse dozens of times each day. Features that appeal to you now may be your nemesis later.
Most prospective homeowners see only the aesthetics, even though they know that they should focus more on practicality.
An energy-efficient home may save thousands of dollars in heating and cooling costs each year, but large, airy windows, a huge basement, hardwood floors, and an expansive yard (with no natural vegetation to block summer heat or winter winds) offers more beauty. A large great room design is “sexy,” but the din of four kids playing in the same room in which you are trying to watch a show, work on the computer, or prepare a meal, may be stressful. Deep, luxurious carpet tugs at the emotions, but may be hard (and expensive) to clean, or difficult to maintain with tons of traffic. A sizeable home with a huge lot in a desirable community may say, “I’ve arrived,” but may also shout “big property tax bill.”
The litany of concerns about making emotional decisions should not deter you, however, from using your emotions to make a buying decision. Although many of us spend more waking hours at work than in our home, we want those precious hours at home to be enjoyable. Being able to say, “I am living in the most efficient house on the block” is of little comfort if the aesthetics are so Spartan that we would rather be at work!
Home buying requires many of the skills that a successful entrepreneur employs. He/she looks at the balance between capital cost and long-term operating costs when purchasing for the business. The capable businessperson evaluates the benefits of short-term versus long-term. Yet, unlike the calculations of a pure capitalist, a homebuyer must also be ready – even eager – to say, “Perhaps I really don’t need this feature,” or, “this item is not practical, but I deserve to treat myself well, and, since I want it, I’m going to let my heart, rather than my head make the choice!”

The Myth of Real Estate Market Crashes

According to the news media, we recently experienced one of the worst real estate market crashes on record in North America. As we listen to the stream of bad news, we are forced to accept and believe that we have undergone a crisis. Yet, does that mean that all of us have been crushed by the economic collapse of the housing market?
In the early 1980s, mortgage and loan rates skyrocketed, with hundreds of thousands of homeowners forced to give up their real estate dream because of the debt burden. Many times that number of aspiring buyers was crushed by the reality that they could not afford to purchase that dream home immediately.
In early 2008, the outlook for real estate sales & purchase across North America was the most optimistic in decades. Houses were being built and bought at a frantic pace.
By early 2009, the outlook was the most pessimistic in decades. Houses were being defaulted into bankruptcy and construction projects abandoned at a furious pace.
Such is the nature of a housing market bubble bursting. Yet, there are significant flaws in the “universal housing crash” stories.
Without a doubt, millions of North Americans have been deprived of their homes, and the real estate industry has suffered a huge hit.
In the US, cities like Memphis have seen as much as 30% of its housing stock subject to mortgage default, while places like Phoenix have been struck by declines in home values exceeding 60%. Condominium construction in Las Vegas has been decimated, with a huge overstock of unsold homes.
In Canada, Vancouver, Calgary, Edmonton & Toronto have experienced pressure on home prices, even though cities like Regina, Winnipeg and some Maritime communities have seen continual upward climbs in home prices.
But, in cities where sales have escalated, there are communities and market sectors where the “bubble has burst.” And, in the housing “death zones” of Toronto, Vancouver and Calgary, there remain vibrant segments of the housing market that have continued to do well in the crisis. In fact, the crisis never actually reached the magnitude in Canada that many experts were predicting. The bubble that stimulated the federal government to change mortgage financing rules may not have posed the threat that the media suggested, either.
Even with the market poised to collapse in 2008-09, the real threat was not to housing stock or to the existing homeowner, but to the financing of home ownership. So, if the quantity of houses continued to climb, there must be an opportunity in that market! Indeed, an astute buyer, throughout the past 3 years, could find a real bargain in most cities hardest hit by the downturn.
The crash of the 1980s, too, was caused by financing problems, rather than housing availability. Still, homes were available, at great prices, for the person who had saved enough for a sizeable down payment.
Much of the media focus on the impending housing bubble burst is directed to pockets, or areas that are at risk. Rising prices have moved many homes out of the reach of first-time buyers. But that has happened in the past, and the market has corrected. Yet, new homeowners continue to show up, as they adjust their budgets and saving habits to enable their purchase.
Those corrections are not immediate. When a mid-range price market folds, new construction may move to entry-level or upscale homes. When new homes become too pricey for many of us, older homes, character homes, or existing starter homes fill the gap.
The media succeeds when people view, read or listen. People view, read or listen when the news is exciting. The media hype would have had us believe everyone was going to die of Ebola 15 years ago, Legionnaires disease 25 years ago, West Nile Virus ten years ago, or terrorist-generated anthrax five years ago. As serious as the threats may have been, catastrophe was not inevitable. As serious as the economic collapse of the past two years may be, home ownership collapse is not inevitable.
With the challenges that the housing industry faces, the reality is that, like Julie Andrews says (paraphrased) in the Sound of Music, “Whenever a door closes, somewhere a window opens.”
Today’s housing market should be looked at not as a wasteland of crises, but a field of opportunities, where, in the right area, the right market, at the right price, there are fantastic prospects for acquiring your dream home, or making a lucrative investment. Perhaps, even, you may be on the vanguard of a new real estate “gold rush.” The window is open.