Housing: What the US could learn from Canada

Why Canada's Housing Market Didn't Crash


"In the U.S., the whole idea of owning a home, there is almost a national obsession," Atkinson says. He knows because he's an American citizen as well. But he also knows that the banking system in Canada does not allow for the type of irresponsible buying and borrowing that we saw in the U.S. at the height of the recent housing boom (2004-2006).

For one, there are just six big Canadian banks that own the bulk of the mortgage market, and they don't securitize and sell off loans at nearly the rate U.S. lenders do. They hold nearly three quarters of their loans on the books, and 80 percent of Canadian loans carry mortgage insurance.

Canadian banks also had and have no such thing as the Alt-A, or low-doc, no doc loans that fueled bad borrowing and consequent defaults. At the height of the Canadian housing boom barely 5 percent of loans were considered "subprime," while a full third of U.S. loans were either subprime or Alt-A.

"Nobody stopped a Canadian bank from lending in the subprime market, they chose not to," says CIBC's Benjamin Tal. "It was not the government, it was not monetary policy; there were no regulations whatsoever regarding how much you can lend in the subprime market. Canadian bankers decided not to do so, because it was too risky."

Finally, the biggest difference is that if a Canadian borrower goes into foreclosure, the bank can and will come after that borrower's assets until the balance is repaid.

There is no easy way to walk away.

These are full recourse loans.

Canada certainly sees ups and downs in its housing market, and all you need do is look at the downtown Toronto skyline to wonder if there isn't perhaps a Miami-like condo boom going on right now. But experts say the booms and busts are far more measured there. The condo buildings going up are all presold, and there is not nearly the speculative condo investment there that we saw in Miami.

"There is an element of conservatism that runs right through the Canadian housing industry, from the banking, financing element, to the homebuilders and even in the resale of homes," says Phil Soper, CEO of Brookfield Real Estate Services - Royal LePage. "The innovation has safety valves."

Comment: Summary:

  • Banks don't (at least to the extent that US Banks do) sell off loans
  • Little subprime lending - No "Alt-A, or low-doc, no doc loans"
  • Canadian mortgages are "full recourse loans". Can't just walk away
  • No condo building unless it is presold

And everyone is better off!


  1. The first line says it all, it is an obsession to own your own home!

  2. And don't forget; Happy Canada Day, eh!

  3. If you take a look at the major Canadian banks, they are stronger then our major US banks.

    Consider Toronto-Dominion Bank: It's paying a 3.4% dividend. (Probably would be a good investment ... note the low P/E ratio!). I personally would not be investing in US Banks at this time!

  4. More comparison between a Canadian bank and a major US one: Invest in Wells Fargo? No, Buy These Stocks Instead!

    Royal Bank of Canada (NYSE: RY) as a better opportunity among similarly sized companies in financials. CAPS member simonhs made the case earlier this year that Royal Bank of Canada is about buying a quality company that still pays a quality dividend:

    RBC is the biggest bank in Canada and is often touted as among the best in the world. Asset management side of RBC's US division has attracted some of the best money managers out there. London division doing very well. RBC also investing heavily in growing Asian markets. Good dividends.

    Currently, Royal Bank of Canada hardly looks cheap with a price-to-tangible book of 3.1 compared with Wells Fargo's 1.9. On the other hand, it provides a much more attractive dividend yield: 3.9% versus 0.8% for Wells Fargo. Also, Royal Bank of Canada posted the strongest gross domestic product growth in a decade in Q1 of 2010, and forecasts a healthy 3.6% GDP growth for the year. If Canada's economy continues to show strong growth and the U.S. economy continues to disappoint, then there's good reason to look at Royal Bank of Canada as an attractive alternative to Wells Fargo for your portfolio.


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