Is the Canadian housing market in a bubble or not? Its a question that Canadians and foreign investors in Canada worry about these days. Almost not a week goes by without the media talking about the housing market in Canada. This is because housing prices in Canada continue to remain strong despite weakness in the economy. Rightly so many investors wonder how long the party can last.
Though the Canadian economy is highly dependent on the U.S., the country’s housing market has remained exceptionally strong in the past few years. Instead of trying to predict if the housing market in Canada will crash or not, investors may be better off trying to understand why the market is holding up so well. Though the U.S. and Canada are closely integrated in many ways, the housing markets are vastly different between the countries. In this post, let us take a look at some of the differences between the U.S. and Canadian housing markets.
The chart below shows the growth of house prices in US and Canada since 2000:
Click to enlarge
Home prices in Canada have followed an upward trend since 2000. While housing prices fell during the recession starting in September 2008 prices have again recovered strongly to exceed pre-recession levels by about 14.1%. Compared to the Canadian market, the prices in the U.S. have fallen heavily since the recession and only this year has started to moderate or rebound slightly.
Some of the difference between Canadian and U.S. housing markets are listed below:
|1||Lender||Chartered banks originate majority of the mortgage loans.||A variety of entities including non-regulated ones can originate mortgage loans.|
|2||Recourse/Non-recourse||Almost all of the mortgage loans are recourse. Hence in case of a foreclosure, a lender can go after the income and assets of the borrower to recover losses. This setup also forces Canadians to make mortgage payments without fail and on time.||Most loans in the U.S. are non-recourse. So borrowers can walk out of the home with no worries. As a result some people simply abandon the property when they cannot make payments. Some just mail the key to the house to the lender by regular mail as a courtesy and move on with their lives.|
|3||Ownership of Loans||Loans remain on the balance sheet of banks and the mortgage market is not particularly exotic and securitization of loans is very low.||Most lenders do not hold the loans as they are always securitized and sold to investors. This process makes the determination of the actual owner of the loans almost impossible. In some foreclosure cases this issue is being fought in the courts by borrowers.|
|4||Payment Method||Most Canadians make mortgage payments by automatic debit from their bank accounts. They can also make flexible payments to smooth-out cash flows and reduce interests paid.||Most mortgage payments in the U.S. are not automatic and the amounts are generally fixed. Borrowers make payments at the beginning of the month and very few lenders allow flexibility.|
|5||Mortgage Interest Tax Deduction||Mortgage interest paid is not tax deductible.||Mortgage interest paid is tax deductible. This encourages people to lever up on the housing market and also incentivizes borrowers to carry large debt.|
|6||Duration||The maximum duration of a mortgage loans is 25 years.||Mortgage loans typically have a duration of 30 years.|
|7||Down Payment||A down payment of at least 5% of the purchase price of the house is required.||Before the bubble burst, down payments were optional. Many of the sub-prime borrowers were able to get loans with no downpayments. Lending standards were so lax that even an illegal alien could get a loan of $500,000 or more to buy his "American Dream" home with a NINJA (No Income, No Job and No Assets) loan. Only recently lenders have started to require documentation and some down downpayments to obtain a mortgage loan.|
Source: Housing Market and Macroprudential Policies: Is Canada a Success Story?, Econote, August 2012, Societe Generale