Interesting observations from Merrill Lynch’s Sheryl King and Ryan Bohren. They believe Canadian housing is “in bubble territory” with commensurate “down-side risks remain despite an accelerating economy.”

However, they are not looking for a Canadian Housing crash.

The “structure of the Canadian mortgage market greatly reduces the probability of a US style housing melt-down.” The US had excessively risky lending by vulnerable financial institutions, along with vastly over supplied housing market.

What makes Canada so different?Four factors of the Canadian mortgage market:

1. We find government guaranteed mortgage insurance mitigates risk to financial institutions. Unlike the US where financial institutions were clearly over exposed and the solvency of insurance providers were questionable. 75% of mortgages in Canada are fully insured with Government guarantees and all mortgages with an LTV higher than 80% must be insured by regulated lenders.

2. Legal recourse laws reduce the risk of households walking away from their mortgage and implicitly improve lending quality, unlike the US where reports of abandoned vacant homes were and remain rampant. By our estimation around 90% of mortgages are full recourse in Canada, creating a more lender-friendly environment.

3. About 30% of the mortgage funding market has a federal government guarantee, which likely reduces the risk of a US style funding freeze. Indeed during the height of the credit crisis, the Government of Canada initiated a very effective Insured Mortgage Purchase Program which essentially kept the Canadian mortgage market functioning.

4. Canadian’s have historically held lower leverage ratios than their US counter parts and tend to gravitate to more conservative mortgage options. Canadian household balance sheets have deteriorated and have been treading into more risky areas like variable rate mortgages, but sub prime lending remains a virtually non-existent market in Canada.


UPDATE: March 21, 2011 3:22pm
Here is the Merrill piece:

Our homes have four walls (PDF)


Why no Canadian, Australian housing busts?
Tracy Alloway
FT Alphaville, Mar 21 15:31.

Category: Credit, Real Estate, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “How Did Canada Miss the Housing Bust?”

  1. wally says:

    Debt is one issue; price is another. My understanding is that house prices have zoomed in both Canada and Australia. This may not collapse like a bubble, but two sources of stress occur: prices get out of line with income and the price of old houses gets out of line with new construction costs. These two issues mean that a long, slow death is in store for people who are trying to sell their current home even if there is no short-term collapse.

  2. crutcher says:

    #2 definitely… Canadians will never know the joy of posting jingle mail and gleefully shouting, “So long, suckers!!!”

  3. curbyourrisk says:

    Was up visiting a Candian customer 2 weeks ago. They are very worried about the housing situation up there right now. MOST of their revenue comes from it and they are already seeing some cracks…… Just a little enectdotal information. Sorry no links….just a customers view point.

  4. curbyourrisk says:

    Factor 5: canadian government does not buy into extend and pretend. They do not alow their banks to game the system. They do not allow them to blatantly lie on their 10-K statements. Canada actually follows the rule of law. Canada is not the US……

    Who ever would have thought a nation who’s currency is the loon would have a better anything than us???? We have so much to learn… PONZI is not the sanswer it is the problem. Bernanke….you are PART of the problem and you must go. Geithner….please join his ticket out of here.

  5. Dr N says:

    I’ m not so sure about this. Prices can still go down by a lot – they have in the past. If they do the major hit will be to the mortgage insurer CMHC. Households are less likely to walk away because of recourse, but this has an impact on labor mobility. In my view some markets, especially Vancouver and Calgary, are on the precipice, but a catalyst is needed to push them over; something like a commodity crash, a spike in interest rates, or a substantially weaker economy.

    Articles that argue that a real estate crash is unlikely in Canada seem to assume that existing rules about LTV, down payments and so on are being adhered to. In the lower B.C. mainland, the entire real estate industry from construction on up is notoriously corrupt, fueled by drug money and the general zeitgeist of the place. Thus, this area is particularly fragile, and not just from the potential of a major earthquake. (when the big one hits we’ll find out how many building code shortcuts were taken)

  6. TheUnrepentantGunner says:

    Those reasons leave me unconvinced.

    Maybe it will slightly soften things, but it’s still a crash, albeit a slower speed one. (in that sense wally is right)

    The issues that you identified barry in the US housing market so presciently (first time homebuyers all but frozen out of the market if you have to put 20% down), will catch up with canada. Then someone gets in job trouble for whatever reason, or money trouble and has to refinance. They can no longer do so.

    In the US people were living way beyond their means, and then financing it thanks to that company that used to advertise… “Call us, when others say no, we say yes!” And they refinanced right up until they couldnt bribe that appraiser to get that sweet appraisal.

    Even if that is slightly avoided in canada, the conservative financing should still create a supply/demand imbalance. That combined with the loony which has stayed strong makes for an unhealthy ability to get into the market, and as people look to exit they won’t get the price they want.

  7. realgm says:

    Vancouver’s housing affordability is surely in the bubble territory, but most other places in Canada are not there yet.

    There are a lot Chinese immigrants buying houses in Canada with CASH. A lot of corrupted Chinese officials would send their family members to Canada, the US, or wherever they can immigrate and buying houses there with black money. I would think quite some houses in Vancouver are bought by these people and that’s why the housing market is so crazy in Vancouver. The income level in Vancouver is lower than in Toronto, but the housing prices in Vancouver are so much higher than in Toronto.

    There had been many “stories” that these corrupted Chinese officials would have their family outside of China with most of the money and as soon as there are news that they are under investigation, these people would leave China and reunite with their family and take whatever money they can bring with them. Due to so much corruptions in Chinese gov’t, the Chinese gov’t approach would usually be letting these people escape because arresting these people would trigger much bigger troubles.

  8. AHodge says:

    answer: not much canadian boom, booms often cause busts.
    more generally: Canadians are one refutation of the “how could we have known” BS chorus in the US?
    And they worked to clean up their already somewhat better asset backed accounting in 2008.

    the Merrill geniuses seem not to have learned anything from their own near death experience

  9. AHodge says:

    oops wrong partly
    having read them merrill actually gets parts of why canada better
    but i dont get why they say there is a bubble
    but not worried about correction

  10. eirich1c says:

    What makes Canada so different? Well, those four factors of the Canadian mortgage market are flawed with erroneous assumptions.

    1) A government guarantee protects the lender, not the borrower. If interest rates reset at 3% higher, a large group of vulnerable individuals are likely to be unable to afford their homes. This will place downward pressure on prices. Interest rates are at historical lows (emergency levels), and will quite obviously normalize in the near term.

    2) In the US melt, some of the hardest hit states had (and still have) strict legal recourse laws in place. For example, deficiency judgments are common in Florida. Lenders frequently sue for deficient amounts, and win.

    3) Regulations have already been tightened; largely due to the fact that our central bankers know they are currently walking a tight rope. A funding freeze isn’t required, as those who would have received mortgage funding are now essentially forced to warm the bench and wait until they can save more money for a down payment (10% minimum up from 5%), and a higher salary (no more 35-year mortgages).

    4) The author does not understand the sub prime market. No, we didn’t lend $800K to strawberry farmers earning $12K annually. But we did lend $500K+ to individuals with NO MONEY (i.e. 0 down, 40 year amort) or very little money (5% down, 35 year amort, and 7% cash back).

    Purchasing a home with 100% leverage, a very short tenure of employment, an uncertain job market and poor economic outlook is, to me, the definition of sub prime. Sub prime, contrary to public understanding, has nothing to do with the interest rate. It has to do with the quality of the borrower’s risk. When you give a big loan to person with no money when interest rates are at historical lows and destined to reset higher, you’ve created your own sub prime market.

  11. None of the above:

    Why no Canada housing bust? Two things:

    1) During the aughts, Canada was running trade surpluses, it’s dollar steadily strengthening while the US was running trade deficits. Canada is a commodity-exporting powerhouse. The US financed a goodly portion of its trade deficits through exporting residential real estate (i.e., selling GSE-backed MBS to overseas investors), contributing to the tsunami of money washing over American residential real estate. Canadian banks didn’t need to abandon risk management to make money. All they had to do was watch their loonies get more valuable. It’s also why Canada didn’t have much of a financial crisis.

    2) Canada’s so far north that it can’t forget winter. Where did the housing bust hit hardest? In the sunshine (or sandpile, if you prefer) states. Winter disciplines the mind and soul, making prudence during good times practically instinctive. It could be argued that the fantastic successes of capitalism at creating and accumulating wealth (that allowed all those Americans to abandon winter for sand and sunshine) depends not on fancy economic systems and theories but is the result of the discipline that winter instills in the soul. Take out a globe and see if you can find one fully-developed economy that lies in the tropics. The saving and investing so necessary to capitalist development got started with simply trying to survive until spring. As Americans tried to minimize the impact of winter by moving south, they also abandoned, in some measure, the idea that winter, economic or otherwise, always follows summer.

    The upshot is that differences in government policies may have had less to do with Canada’s escaping the bust than did a good export market and the weather.

  12. Petey Wheatstraw says:

    I travel to Canada frequently, and usually price small farms while I’m there. Prices have gone up quickly in several provinces. The CAD is also up against the dollar, trading in the $1.01 – $1.03 CAD to $1.00 USD range for the past several months. Not a good time to buy Canada RE.

  13. mpavan says:

    The bubble has not burst. Yet. When a ~200K family income cannot get you into the market for a house within almost all Vancouver’s city limits, there is a problem. Apart from housing there is no significant economy here.
    Maybe chinese hot money, maybe pot growers laundering their money. maybe the tooth fairies diversifying their holdings. who knows – it will end.

    Patience, Grasshopper.

  14. Thor says:

    I see a lot of comparisons of the Canadian housing market to the US housing market. Why? Because they are just north of us? There have been a LOT of countries in the last 20 years who experienced a similar bubble in real estate prices to Canada. Japan, China, Ireland, Spain, etc. Why compare it to the US and say “a US style housing crash could not happen in Canada because. . . ”

    The question being asked shouldn’t be how the Canada market compares to the US, but how it compares to other RE bubbles over the last 20 years. Just because their housing market doesn’t look like ours, doesn’t mean they can’t have a RE collapse like Japan or Ireland. Their housing markets didn’t look much like ours either, but that sure as shit didn’t save them in the long run.

  15. Thor says:

    eirich1c also has a good point. What are the percentage of homes in Canada under adjustable rate mortgages? What is the percentage of homes sold in the last three years are adjustable? When do those rates reset and what, if anything, will that do to home sales?

  16. greg says:

    Maybe the problem is simply this, we may have to face the fact that not everyone will be able to afford to buy a house, depending on where they work and live. We’ve unfortunately chose to pretend that it’s everyones right to do so. That is, and has never been true.

  17. bazzab says:

    As a dual Canadian-American, I can tell you the difference between Americans and Canadians. Canadians are far, far more conservative than Americans. With respect to debt, Americans are reckless while Canadians are intelligent. They understand mortgages and their mortgages are much shorter term. Plus, the few Cdn banks have greater control over the consumer choices (terms, rates, penalties). The American system is less controlled by banks (ie. less regulation, huge competition, bizarre ‘innovated’ products).

    That does not mean my comments are the same for all Canadians. Especially in this last decade.


  18. winstonw says:

    Ask yourself how housing can go up faster than GDP for over 7 years.

    Answer: Credit growth went up faster than GDP.

    How does that happen?

    Answer: The nation borrows more foreign dollars. Australia’s net foreign debt has jumped 70% in the last 20 years. This makes the country more dependent on foreign risk appetite for the stability of house prices. It also means a higher cash flow heads off shore, thus reducing the money multiplier.

    It is an unsustainable trend for credit to grow faster than GDP. Those who argue all is ok are doing so on the basis of a commodities demand from Chindia. Growth of commodities demand however will one day slow, as will credit appetite from foreign lenders to Australian house buyers. Further, the greater cash flow offshore impoverishes the nation, along with median house prices 10x the median wage. It baffles me that anyone can think this is a sign of economic prosperity.

  19. Dr N says:

    Keep in mind that few Canadian mortgages have terms longer than 5 years; that is every 5 years the mortgage is re-negotiated at the prevailing rate (so if rates go up everyone’s payments go up within 5 years). In addition many mortgages are variable rate ( I don’t know how many) but a number of reports suggest that the proportion of variable rate mortgages has increased with the price of real estate. [my own mortgage is variable rate and the rate has hovered between 1 and 2% for the past 2-3 years. It might as well be zero.] Now imagine how much house you could buy with 0% down and essentially 0% interest rate. This explains, I think, a good part of why house prices remain suspended at such high levels. Coyote has run off the cliff but doesn’t realize it yet.

  20. Lord says:

    Canada’s housing bust happened in the early 90′s so a repeat is not likely. Their resource export base has them performing much better than the US which is why the Canadian dollar is so high. Mortgages are 5 year and not tax deductible which leaves them as much less valuable for speculation.

  21. dss says:

    Lending standards.

  22. farmera1 says:

    1. The Canadians didn’t get the joy of Greenspan implementing Ayn Rand’s insightful wisdom

    2. Canada didn’t enjoy the benefits of the Ownership Society

    3. Deregualtion wasn’t a religion

    4. I don’t believe corporations are human citizens in Canada

  23. ShakeNBake says:

    I think liquidity courtesy of the CMHC kept the Canadian housing market going when US liquidity dried up. But is that a good thing?


  24. Mike in Nola says:

    Agree with the other skeptics. I still remember when we were in Vancouver 18 months ago and saw a house in really bad shape partially encircled by an highway entrance ramp. Asking price was $500k.

    Canada, like Australia, though on a smaller scale, has been buoyed by commodity exports and Far East house buyers. When China pops, so do Canada and Australia.

  25. Mike in Nola says:

    Forgot to mention other bubble-like symptoms, like burgeoning HELOC’s. Remember seeing or hearing a piece recently that Canadians are using them to buy houses and condos in FLA, sight unseen. Canadian household debt last year hit close to 150%, which is only a bit less than that in the US during the bubble. http://www.journalpioneer.com/Business/2010-10-20/article-1863316/Canadian-household-debt-rising-faster-than-in-United-States%3A-TD-report/1

    I’m sure there are articles saying this level has come, but that is because the stock bubble has pushed up average household net worth. What the households have to service the debt hasn’t gotten bigger.

    If you read this, you’ll see all the same stuff from the government we heard 4 years ago south of 49th parallel, e.g. we just need so tweaks to keep things from falling apart.

  26. burbed says:

    I don’t you can write this piece without including the mortgage interest income tax deduction.

    Here in Silicon Valley, where supposedly the smartest of the smart people live, and where the mortgage:rent spread regularly hit over 2:1, you’d be surprised at how many people would say that borrowing as much as you can is a smart way to reduce your taxes.

    Strangely, when I point out, that you also get an income tax deduction for getting robbed, gambling losses, or donating money to charity – and therefore you should do more of those, people think that’s ludicrous.

    But hey, that’s vox populi at work. Any politician who dares to overturn the mortgage interest deduction would immediately lose his job. The people want you to be rewarded for helping the banking industry.


    BR: Because we had the mortgage interest tax deduction for 100 years, and it never caused an issue prior. Hence, it was not the cause of this crisis.

  27. Tubby01 says:

    Would you buy this place for $1Mill AUD?


    You have to pay a stamp duty to the State Government, possibly around $40,000 AUD on the txn.

    Bulli is a suburb that is an outer suburb of Wollongong, which is around 1.5 hours away from Sydney.

    Its obviously very close to the beach, but the area was never a wealthy area as it was mainly used for Public housing and coal miners. However this isn’t uncommon for the area.

    Another interesting blog on the subject:


  28. AG Sage says:

    I can’t follow the Merrill link, but did they happen to mention that during the relatively tiny downturn in 2008 the Canadian banks got a $100 billion bad mortgage bailout from CMHC? Wiser banks? Hardly. In short, Canada has not “missed” anything, they simply delayed the inevitable.

    dss, Stories of 90k earners getting financing for 700-800k have been circulating. As have been copies of flyers from banks assuring people they can get get a cash back deal to cover the down payment, so 0% down is still available and with skip a payment, 40 year amortization was still technically available (until a few days ago,). Also flyers targeting the self-employed assuring them they don’t have to use their tax returns to prove their income. It’s basically a massive redux going on up there, all guaranteed by the taxpayers. Fun times.

    Thor, they all are ARMs. There is no such thing as a 30 year fixed rate mortgage. (Or in the case of the “housing rescue” circa 2006-2008, 40 year (0% down baby!)). Those 40 year zero down mortgages issued during the liquidity dump are going to start adjusting this November. The extent of the house of pain is going to be determined heavily by the interest rates at that time. Those borrowers paid down barely any principal and could get stung badly by payment increases. Imagine, an entire country of teaser rate mortgages (given how aberrant current interest rates have been compared to the long-term average).

    On April 18th, CMHC is pulling their insurance backing of HELOCs. Every year roughly 20% of owners have taken out 45k in equity and up until next month that was all guaranteed by CMHC, so one might guess they have been easy to get. Households in BC have been running a negative savings rate for years. With their equity take-out crimped, I expect distressed sales will start entering the market.

  29. takloo says:

    Having a sound mortgage market structure/framework is not sufficient to prevent a bubble…

    Owner/investor psychology is the same everywhere!… my family tells me house prices always go up… in the very long run (10+ yrs) that might be true but with the unusual rise in of the last 5 years I doubt the recent increase is sustainable

    Even though government has changed rules twice in one year, banks and real-estate brokers blatantly circumvent the rules… min. down payment is 5% but banks will give you another loan to cover this 5% and u get 0% down!…

    i was looking to buy a house since early 2008, those same houses are well over 30% more 3 yrs later, prices in some suburbs of Toronto are up 10% in the last 6 months!

    I finally caved in and bought a house last week… but I was and am still bearish on Canadian RE for a while – I frequently write about Canadian RE


    I dont think it is a bubble but the pace of increase is not sustainable… some key metrics (price/rent, price/income, etc) are above trend/average but not truly out of whack…