This article is a guest contribution from Barry Ritholtz, or the BigPicture.
Yesterday’s WSJ had an article about Canada’s Housing market. (Housing Rebound in Canada Spurs Talk of a New Bubble). The article noted that “Average home prices in Canada have risen 23% from their trough in January 2009. Home-sales volumes are up 70% over the same period . . . Canada’s housing recovery has been so rapid that some here are worrying about a bubble.”
But to call it a rebound misses the point. As the Cleveland Fed pointed out, Canada’s housing market never went bust — there was a sales dip, but nothing like the US. And prices have continued to go higher to the point where the Journal is now discussing them in terms of bubbliciousness.
Why is that?
There are a variety of reasons why Canada’s market held up better than that in the US, but I boil it down to the big four:
1) Lending Standards: Were increasingly non-existent in the US from 2001-07. On the other hand, Canada never had the non-bank lenders that abdicated these standards en masse. There was no “Lend-to-Securitize” business model in Canada.
2) Mortgage Insurance: Mortgage with less than 20% down payment are considered a high LTV ratio (This was 25% previously). Mortgage insurance is required. Over 80% of Canada’s homes have what was commonly known as PMI in the US.
3) Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave.
4) Single Regulator, Lack of Regulatory Capture: The hodge podge of Federal and State regulators encourages forum shopping; it also masks much of the massive lobbying effort by US banks and investment houses. Lobbying dollars don’t seem to be nearly as pernicous or corrupting Noprth of the border.
The Cleveland Fed also noted that subprime mortgages accounted for a fifth of all US mortgages originated between 2004–2006. In Canada, the subprime market share was roughly 5% percent in 2006—compared to 22% percent in the U.S. And the Canadian never expanded significantly into the wackier exotic mortgage products — IOs, Neg Ams, Piggy Backs, etc. (interest-only and negative-amortizations grew rapidly in the U.S. from 2003 to 2006).
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US vs Canada Delinquency Rates
US vs Canada Home Prices
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Sources:
Housing Rebound in Canada Spurs Talk of a New Bubble
PHRED DVORAK
WSJ, Feb 8, 2010
http://online.wsj.com/article/SB10001424052748703808904575025100730017666.html
Why Didn’t Canada’s Housing Market Go Bust?
James MacGee
The Federal Reserve Bank of Cleveland 12.02.09
http://www.clevelandfed.org/research/commentary/2009/0909.cfm
What Toronto can teach New York and London
Chrystia Freeland
FT, January 29 2010
http://www.ft.com/cms/s/2/db2b340a-0a1b-11df-8b23-00144feabdc0.html
Additional Sources:
Nobody’s saviour
TARA PERKINS
The Globe and Mail, Apr. 20, 2009
http://www.theglobeandmail.com/report-on-business/article1138040.ece
Homeownership Rate Falls Back to Pre-Boom Level (Economix)
http://economix.blogs.nytimes.com/2010/02/02/homeownership-rate-falls-back-to-pre-boom-level/
Jumbo Mortgage ‘Serious Delinquencies’ Rise to 9.6%
Jody Shenn
Bloomberg, Feb. 8 2010
http://www.bloomberg.com/apps/news?pid=20601110&sid=at0fpRHaUHhE
February 9th, 2010 at 10:44 am
Your article says Canada average home prices were up 23% from the trough but the graph looks like house prices are still below Jan. 2008. Please explain.
February 9th, 2010 at 11:28 am
Thanks for pointing out that the chart that was included did not show the answer to your question. Here is the up to date chart from the quoted WSJ.com article.
February 11th, 2010 at 10:04 am
There are a number of inaccuracies in this article. Canada did have a loan to securitize market and still does - in fact most new mortgages in the last one to two years have been securitized through CMHC, a government corporation. Mortgage insurance protects the lender (banks and trust companies) but not the borrower. Most US States (except for some in the West) have full recourse mortgages.
February 11th, 2010 at 10:37 am
John,
Thanks for pointing this inaccuracy out. Here is a clipping from the National Post confirming what you have shared.
PD
February 14th, 2010 at 12:26 am
Also, mortgage rates in Canada may be extremely low. I know of at least two people in Vancouver who have mortgages at between 1-2%. They say they are \"locked-in\" but when I pressed them the both had the same annoyed admission that the term was for five years. If this anecdotal evidence is true on a wide scale then Canada is at huge risk of a bubble and real estate collapse.