Tuesday, December 08, 2009

Housing: Canada vs. the United States

Canadian vs. U.S. housing prices:

Canadian vs. U.S. delinquency rates:

Commentary from the source:
While it is difficult to disentangle the reasons why Canada avoided the subprime boom, some factors can be identified that may have contributed to the differences in the Canadian and U.S. subprime markets.

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.

The Canada-U.S. comparison suggests the low interest rate policy of the central banks in both countries contributed to the housing boom over 2001–2006 and that a relaxation of lending standards in the U.S. was the critical factor in setting the stage for the housing bust. A caveat worth emphasizing, however, is that the Canada-U.S. comparison tells us little about what would have happened if U.S. monetary policy had been tighter earlier. Tighter monetary policy in the early part of the decade may have helped to limit the subprime boom by slowing the rate of house price appreciation over 2002–2006. The Canada-U.S. comparison does, however, highlight the practical challenge facing policymakers in assessing whether a rapid run-up in asset prices is a bubble or a “sustainable” movement in market prices.


  1. One other blog I sometimes read is this one:


    that discusses the housing bubble in Canada. The blog (and book) author is warning about the bubble. But it doesn't seem like anything has popped yet.

    In the Vancouver market, there is the buildup to the Winter Olympics that is probably also helping keep prices inflated. But in 2 months, that will be over.

    I work for a Canadian company, and I was talking with some colleagues some months ago. They asked if I had sold my house here in DC, and I said yes, I had. I asked whether they had a housing bubble in Canada (outside of Toronto), and they said they didn't think so. Which is sort of telling, I guess. Or maybe their office is far enough from the city that where they live there wasn't much of a bubble.

  2. I think the first chart is an indicator that the US market has already corrected and is entering oversold territory. I.e., US prices are back to where they would have been if there had been no bubble (with Canada serving as the reference trend line).

    I see the same thing when I look at the 20-year charts on this site for Phoenix, Las Vegas, etc. They haven't been updated in ages. But, even at the time of last update they were very close to their normal trend line.

    Maybe there are other factors. I'm not trying to sound like I'm enthusiastic. Just saying it looks like prices are back to where they would have been.

  3. My wife and I are wanting to move to BC in the future.

    I don't buy it that the bubble in Canada does not exist. Anyone who's visited BC will quickly become shocked by the cost of housing there. It's worse than LA and the average income there is less than LA.

    So how can that be? Where's the money coming from? I've asked this question on Canadian housing blogs and people can't answer it.

    To get a nice place in BC, you'll need to spend a minimum of $700-800K CAD. As far as I know, our income in the US would have a hard time supporting such a payment for a home that expensive....and we'd make even less over there.

    I don't know what people do over there to afford such expensive properties.

  4. "I don't know what people do over there to afford such expensive properties."

    The same thing they do here in DC. Own before the bubble. Then pretend there isnt one.

  5. A rapid rise in prices is not always a bubble. Just like a slow steady rise in prices doesn't prevent a precipitous drop.

    In BC, especially around Vancouver, there are geographic and legal constraints on growth that create scarcity. This drives up property values in the region of scarcity, which then ripples out into raised prices in outlying communities.

    That dynamic has been going on in BC for more than 20 years. There have been periods of significant house price appreciation, and drops. But through it all, the area has had some of the highest prices in Canada. Given the long-term persistent elevation in prices, I would be careful about comparing those prices to local income and drawing any 'housing bust' conclusions.

  6. A rapid rise prices does constitute a bubble when everything else that is required to feed that bubble remains the same.

    Just because you have geographical constraints does not mean prices will go up....people STILL need to afford to live there. Where's the money coming from?

    Los Angeles also has geographical constraints but it didn't prevent a drop of over 35% in prices...all the while we're being flooded with more and more people.

    You still don't answer the reason why prices are increasing in the face of job loses, stagnant wages, etc...merely dropping interest rates isn't enough to explain the ludicrous increases in prices in BC.

    Where's the money coming from?

  7. I am from Canada, interest rates are quite lower there, most people float month to month and right now can get loans for 2.15% or so, Google around and you will see. People have been doing variable rates (month to month float) for the last 10 years and it has worked out very well.
    However, you can't deduct interest from your taxes as you can in the Status so it does make it strange to see higher prices.
    Canadian economy is doing well, when commodities do well , Canada does well.

  8. The combination of low interest rates and loose financial regulation (i.e. sub-prime mortgages) created artificially high house prices in the USA. Then the bubble burst. I read estimates that 20% of all mortgages in the US were sub-prime (one fifth), while 5% were considered sub-prime in Canada.

    Also in urban areas (Toronto, Vancouver, Montreal, Calgary, etc.) we have international investors who are bidding for homes - not just Canadian citizens.

    There was a small dip in urban housing prices in 2008 (a "soft landing" of sorts), but then there were record sales in 2009 in Toronto, for example (inclusing price appreciations). There seems to be more stability due to the health of the big Canadian banks, plus the bank lending regulations in place. Thus I don't anticipate a big bursting bubble in the Canadian real estate market.