The differences between the U.S. and Canadian housing markets astound me on a day-to-day basis. In my neighborhood in Toronto, housing prices are up and homes sell in a few days, some with multiple bids. In Detroit, where we visited for Thanksgiving, you can’t sell – or in some cases, even give – houses away. Visiting Miami for Art Basel, the numbers of houses and condos on the market are staggering – stunning, brand new towers remain virtually empty.
The Cleveland Fed reports on the key differences between the U.S. and Canadian markets (pointer via Marginal Revolution).
Despite their many points of similarity, housing markets in the United States and Canada have fared quite differently since the onset of the financial crisis. Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. As a result, observers such as The Economist have pointed to Canada as “a country that got things right.” …
The Canada and U.S. housing market comparison suggests that relaxed lending standards likely played a critical role in the U.S. housing bust. Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust. A likely candidate is cross-country differences in the structure and regulation of subprime lending markets …
But while subprime lending also increased in Canada, the subprime market remains much smaller than in the U.S. The most cited estimate is that subprime lenders had a market share of roughly 5 percent in 2006—compared to 22 percent in the U.S. (Mortgage Architects, 2007). Moreover, the Canadian subprime market never expanded significantly into newer products, such as interest-only or negative-amortization mortgages, whose popularity grew rapidly in the U.S. from 2003 to 2006. Instead, the Canadian subprime market mainly offered products popularized in the U.S. during the 1990s, such as longer amortization periods for loans (from 25 to 40 years), and mainly targeted near-prime borrowers.
Securitization has also been less common in Canada than in the United States, with roughly 25 percent of Canadian mortgages securitized in 2007 versus nearly 60 percent in the U.S. The Canadian securitization market has grown rapidly over the past decade, rising from roughly 5 percent of mortgages in 1998 to over 25 percent in 2008 …
Perhaps the simplest story is that Canada was “lucky” to be a late adopter of U.S. innovations rather than an innovator in mortgage finance. While the subprime share of the Canadian market was small, it was growing rapidly prior to the onset of the U.S. subprime crisis. In response to the U.S. crisis, some subprime lenders exited the Canadian market due to difficulties in securing funding. In addition, the Canadian government moved in July 2008 to tighten the standards for mortgage insurance required for high LTV loans originated by federally regulated financial institutions. This further limited the ability of Canadian banks to directly offer subprime-type products to borrowers.
There are also several institutional details that played a role. The Canadian market lacks a counterpart to Freddie Mac and Fannie Mae, both of which played a significant role in the growth of securitization in the U.S. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles. Finally, as noted above, the fact that the government-mandated mortgage insurance for high LTV loans issued by Canadian banks effectively made it impossible for banks to offer certain subprime products. This likely slowed the growth of the subprime market in Canada, as nonbank intermediaries had to organically grow origination networks.
December 3rd, 2009 at 2:38 pm
This discussion of policy, institutional and legislation differences all makes sense.
However, few ever discuss what I think is an equally big difference between house buying in Canada vs the US: moral hazzard (in a manner of speaking).
In Canada, your mortgage loans are recourse loans — you cannot walk away without declaring bankruptsy (which means giving up everything — car, retirement savings, good credit rating, etc.). In the US, mortgages are non-recourse loans that you can walk away from.
So, why not buy a house you cannot afford if the worst case scenario is walking away and renting for a few years if rates increase.
In Canada, buying a house you cannot afford comes with the risk or permanent personal financial ruin.
December 3rd, 2009 at 3:08 pm
“The differences between the U.S. and Canadian housing markets astound me on a day-to-day basis. In my neighborhood in Toronto, housing prices are up and homes sell in a few days, some with multiple bids. In Detroit, where we visited for Thanksgiving, you can’t sell – or in some cases, even give – houses away.”
Perhaps astounding mysteries like this were never even meant to be understood by mere men.
December 3rd, 2009 at 8:40 pm
I wonder what a comparison of Vancouver with Portland or Seattle, or of Toronto with Boston or Manhattan would look like? Probably some discrepancies, but not as drastic. Comparing a hot creative center (Toronto) with a struggling and collapsing region (Detroit) isn’t a good indicator.
In my neighborhood of Portland prices aren’t up and sales are slow, but I don’t know of any foreclosures or drastically cheap bargains.
That said, Canada definitely handled its banking industry better, and more stable housing is a reward. But the basic US mortgage model has worked for over a century and I don’t think is to blame for the overbuilding and overlending.
December 5th, 2009 at 8:35 pm
It is much more difficult to make money in Canadian real estate, even for developers.
December 15th, 2009 at 4:06 pm
Below is an article I wrote a bit ago on the difference between Ontario and Michigan cities, also based on Thanksgivings in Detroit.
From Riverview to Toronto
Why Ontario Municipalities Grow While Michigan’s Shrink
by Global Urbanist
I moved to Toronto in 2002 sceptical if the higher taxes, additional cost of living, and more snowfall would be worth it. One of the attractions the region had over Downriver Michigan was its growth. At the time I assumed the stereotypical Canadian reasons for growth; tighter gun control makes safe appealing cities and liberal immigration policies keeps filling them with people. I later learned these reasons over simplify the fundamental difference in municipal governance between Ontario and Michigan. Ontario cities emphasize land value while Michigan cities emphasize services. The end result is growing populations in Ontario cities, while cities in Michigan pursue revenue growth through services that do not necessarily translate to population growth. The primary differences in Michigan and Ontario cities are…
-Ontario cities can only raise revenue through property tax, and any new type of taxes must be approved by the province
-Michigan cities have home rule which means they can raise revenue through any means as long as they do not conflict with federal or state laws.
-Ontario cities are arms of the province, and can be overruled by the province on all matters.
-Michigan cities are independent entities, almost like corporations with certain constraints defined by the state. The state has influence over the cities but not direct control.
At first glance Michigan cities appear to be strong, in control, and have the tools to create innovative city government. So how have Ontario cities faired better in terms of population growth.
The city of Toronto only has the right to tax through property taxes, and must receive approval for any additional taxes from the province. The city of Detroit can charge any taxes (like income tax or business tax) as long as they are not in conflict with the state. This leads to Ontario cities trying to boost property values to raise the tax base, while in Michigan cities try to off load the tax burden from residents to business and services. The different approaches lead to vastly different outcomes in land use.
Cities in Ontario become much more flexible with their zoning laws as they want to increase density to increase property values. The idea is a 40 story condominium with 300 units is worth more and generates more property tax revenues than a $5 million mansion on the same acreage. The flexible zoning laws do not just apply to developers, but homeowners as well. With a little work to meet fire codes a basement apartment can be added to a residence, greatly enhancing the property value. The intensification encourages population growth, and therefore market growth for local business.
Michigan’s older cities are developed to their boundaries and have a difficult time intensifying land use. City Council’s find it easier to create a new tax on non-residents than to convince existing voters that intensification (more traffic) is good. Workers and businesses start to get taxed on income and assets. At the same time their local market, whether it is their pool of labour or their customers, starts to stagnate. With no market growth start-up businesses have little incentive to enter. The local taxes can be used as an excuse to locate in a different region. In Michigan the fringe of urban sprawl was the ideal environment for a new business with fewer regulations, taxes, and years of market growth as fields become neighbourhoods. Innovation and investment leave the stagnant markets of older cities such as Lincoln Park, Wyandotte, and Riverview eventually leading to a gradual population decline in older cities.
The province of Ontario has several tools to promote development, mostly by overruling local politics. The province can force amalgamations (mergers of cities) should it deem the larger scale would allow them to be governed more efficiently. In Michigan local city councils have the last word in development and zoning, creating an environment that stifles re-development and intensification due to large political risks. In Ontario a developer has the option to appeal a city council decision to the Ontario Municipal Board (OMB).
The advantage of the OMB is exemplified in the following; a developer chooses to build a condominium tower next to a neighbourhood of single family homes. In Michigan the neighbourhood association would lobby a few city councillors against the proposal due to traffic, height, shadows, appropriateness, etc. City council would listen to the resident voters and not approve the proposal. The same would happen in Ontario, except the developer has the option to appeal council’s decision to the OMB. With a few compromise (smaller scale and more green space) the development gets approved and local politicians can blame the province. From the provincial point of view, any intensification that uses existing infrastructure is ideal because new residents will increase tax revenues for the city, the province, and the federal government. The political back lash for the province is minimal because it is localized. New construction sites are not the election issues provincial politicians campaign on/against. The OMB is the province’s relief valve so developments don’t get bogged down by local politics.
Fifty years ago Toronto was half the size of Detroit. Today Toronto is almost three times the size of Detroit. Ontario’s growth is not an overnight gold rush, but a slow and steady process of development and re-development. Michigan’s process of re-development needs improvement if it wants population growth and influence at the federal level. When city revenue is based on the property value of their jurisdiction, cities have an incentive to increase land value. When local politics get in the way of developments, a process should exist to reach a compromise rather than denying the potential tax revenue to the region.
At first glance Michigan and Ontario may seem worlds apart, but they have similarities beyond the climate. Both regions are heavily dependant in automobile manufacturing, with Ontario producing as many vehicles as Michigan. The difference is population growth in Ontario has allowed a diversity of industries to absorb a good portion of the auto industry fall out. In Michigan the industry’s decline is causing a general population decline. In my Toronto neighbourhood a store will vacate a space and everyone is in anticipation of the new venture to replace it during remodelling. On a recent walk through Wyandotte vacant store fronts abound and business ideas float around, but the empty sidewalks make you apprehensive of where the customers would come from. While attending Michigan schools I was taught Henry Ford’s $5 / day wage brought residents to Michigan. My experience in Ontario has convinced me that jobs follow people, people don’t follow jobs. Michigan must set growth objectives for its communities and a process to achieve them. The jobs will follow.
December 16th, 2009 at 11:30 am
The counter to this is well argued by Garth Turner at Greater Fool: the Bank of Canada’s monetary policy is creating an asset bubble that will deflate once the stimulus is removed.