Why Canada's housing market didn't go bust

Why Canada's housing market didn't go bust
Posted: December 09, 2009, 12:27 PM by Jonathan Ratner
Ian McGugan

The Federal Reserve Bank of Cleveland released a commentary this past week asking, “Why didn’t Canada’s housing market go bust?” In the commentary, James MacGee, a professor at the University of Western Ontario, does a fine job of pulling together many strands of research. He concludes that it was primarily the lack of a subprime lending industry in Canada that kept the housing market in this country from imploding.

Anyone interested in the Canadian real estate market should read the commentary—but count me as one reader who believes the paper raises as many questions as it answers. By defining the issue as why Canada’s housing market didn’t go bust in the past, the commentary sidesteps the more interesting question of whether Canada’s housing market will go bust in the future.

The most striking graph in the commentary traces the performance of U.S. and Canadian home prices since 2000. U.S. home prices doubled from 2000 to 2006, then tumbled. They are now about 40% ahead of their 2000 levels.
In Canada, home prices staged a more sedate takeoff and didn’t hit a peak until 2008. They’ve come down only slightly and are still more than 75% ahead of their 2000 levels.

The natural question to ask is why Canadian home prices have done so much better than U.S. home prices from 2000 until now. Home ownership rates in the two countries are much the same; our economies are intertwined.  Doesn’t it make sense that Canadian home prices will eventually follow U.S. home prices downward? (The alternative would be that U.S home prices may surge upward, but that seems highly unlikely given current trends.)

MacGee’s primary exhibit for the subprime-did-it theory is a table that shows the distribution of mortgages by loan-to-value ratios in the two countries. In Canada, nearly 85% of people with mortgages in 2006 had substantial equity in their homes (if you define that category as meaning that their mortgage was worth no more than 80% of the value of their house.) In the United States, only about 78% of people fit into this same category. More Americans had high-loan-to-value mortgages than Canadians.

I agree that the numbers demonstrate that Americans tend to borrow more against their homes than Canadians—but doesn’t that make perfect sense given the ability of homeowners in the United States to deduct mortgage interest on their taxes? However you slice it, the vast majority of homeowners in both countries have substantial equity in their homes, so why should the U.S. market crash and the Canadian market remain buoyant? These are questions that deserve attention.

Freelance business journalist Ian McGugan blogs for the Financial Post

Go to http://tinyurl.com/yddfbch for the full story

Bookmark & Share

There are no comments

Thank you! Your comment has been submitted and is awaiting approval.

The Don Miller Group Team

The Don Miller Group Team

REALTORĀ®
CENTURY 21 Executives Realty Ltd.
Contact Us

Blog Archives

Tags