Housing: What the US could learn from Canada

Why Canada's Housing Market Didn't Crash

Excerpt:

"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!