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Diana Olick, CNBC Real Estate Reporter, has recently published a post on why the Canadian housing market hasn’t suffered from the same maladies that plagued the US.
Among other reasons, Diana cites fundamental differences in Canadian banking, borrowing and home buying.
Diana uses three main arguments to support her theory:
- At the height of the Canadian housing boom barely 5 percent of loans were considered “subprime,” while a full third of U.S. loans were either subprime or Alt-A. As CIBC’s Benjamin Tal explained, “Nobody stopped a Canadian bank from lending in the subprime market, they chose not to,. It was not the government, it was not monetary policy; there were no regulations whatsoever regarding how much you can lend in the subprime market. Canadian bankers decided not to do so, because it was too risky.”
- Just six big Canadian banks own the bulk of the mortgage market, and they don’t securitize and sell off loans at nearly the rate U.S. lenders do. They hold nearly three quarters of their loans on the books, and 80 percent of Canadian loans carry mortgage insurance.
- An “element of conservatism that runs right through the Canadian housing industry, from the banking, financing element, to the homebuilders and even in the resale of homes,” as Phil Soper, CEO of Brookfield Real Estate Services – Royal LePage, explained. “The innovation has safety valves.”
What’s your opinion?
Should the United States use Canada as an economic role model, or is it all just an illusory dream?
Please leave your comment below.
by Nouriel Roubini and Rachel Ziemba
Forbes.com
Canadian banks were conservative enough to avoid the excesses of their U.S. counterparts in recent years, due in part to a consolidated financial sector and strong regulation. Armed with strong balance sheets, these banks continued to lend throughout the recession and helped keep financial stresses in Canada from reaching the levels of their G7 peers.
Yet there are signs that the banks’ balance sheets don’t look quite as strong anymore. Canadian households have rushed to get mortgages and refinance at record low rates; the average mortgage rate was well under 5.0% in September 2009. Banks were more than happy to extend loans, particularly after the government’s purchases of the already-insured long-term mortgages helped unlock long-term capital for the banks.
Although Canadian housing markets weakened in late 2008 and early 2009, particularly in the overheated western Canadian cities, low interest rates, capital inflows, increased liquidity and a reduction in bank lending standards have helped reverse the trajectory. Housing starts, prices and sales have rebounded, despite remaining below their 2008 highs. This improvement is both a trigger and a symptom of the strong domestic demand that has helped Canada exit the recession. The fact that Canada had less excess housing stock than the U.S. is a further support. But recent moves could be overly optimistic.
Nouriel Roubini, is a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE).
Rachel Ziemba is a senior research analyst at RGE for China and oil-exporting economies.