Good planning or good luck?
Why Canada's housing market
It’s been four years since the housing market crashed in the United States. Why did they suffer through such a painful housing bubble and bust, while Canada did not? Was it good planning or good luck that made the Canadian housing market so resilient?
As it turns out, it was the differences in the structure of the Canadian financial sector and specifically, the mortgage market, which helped put Canada in the admirable position it enjoys today.
Some key factors that make the Canadian mortgage market different:
No NINJA mortgages
Before the meltdown, Americans could apply for a mortgage without the lender verifying their income or job status. These mortgages became known as NINJA mortgages meaning “no income no job no assets”. This poor lending practice, along with sub-prime lending, has been widely considered the leading cause of the devastation to the U.S. housing market. This kind of unregulated lending is not available in Canada.
No teaser contracts and low rates
Canadian lenders don’t offer adjustable rate mortgages with teaser contracts of low or zero interest introductory rates. When these teaser-rate mortgages suddenly reset at much higher rates they become shockingly unaffordable for homeowners.
More conservative options
Canadians tend to have less debt than Americans and choose more conservative mortgage options.
Mortgage interest is not deductible
In the U.S., homeowners can deduct mortgage interest against their taxes. In Canada, this is generally not the case. As a result, in the U.S. it is more tempting to leverage your home and borrow against it. In essence, they’re using their homes as an ATM machine, making them more vulnerable when market values decline.
Nationwide banking system
The U.S. has a fragmented unit banking system. Canada has always had a nationwide banking and branching approach, which has created a safer and sounder system. For the third consecutive year, the World Economic Forum has ranked Canada’s banking system as the soundest in the world and a recent Bloomberg report on the world’s strongest banks shows Canada with five banks in the top 20 – National Bank being number one in North America and CIBC number four. Canada was one of the few countries that did not experience bank failures in the recent global crisis and no Canadian financial institution required a bailout.
In summary, it was a combination of these factors and others that helped prevent the Canadian housing marketing from crashing. Looking to the future, as Canadians we should feel confident that the strength and stability of the Canadian banking system, along with prudent lending practices, will continue to protect the economy and the value of our homes.