Canada’s Mortgage Market is NOT like the U.S.

As a Mortgage Professional I often field client inquiries about risks facing Canadian real estate and mortgage markets. With all the turmoil taking place across the border and around the world in real estate markets, now is a good time to clarify some of the differences between us and our neighbours south of the border. Below I have condensed and bullet-pointed a recent Economic Research Report released by Scotiabank that explains the many differences well:

Debt Growth

Much has been made that Canadian debt growth relative to incomes over the last few years has been on par with the U.S. Some are then led to conclude that Canada must face similar stresses to its own housing and mortgage markets.

That said consider that prominent economists believe that recent Canadian debt growth reflects the unleashing of pent-up demand from the 1990s and also point to the fact that Canada’s recession in the early 1990s was more severe and the effects were longer lasting than the US recession and therefore a fair comparison can not easily be made.

Leverage

In Canada total debt as a percentage of total assets sat at 20% at the end of 2007. The US ratio is about 26%. By corollary Americans have used nearly 30% more debt than Canadians to purchase assets.

Canadian mortgage markets are fundamentally healthier than the U.S.

• Canada’s subprime market is small making up only 5-6% of outstanding mortgages vs. the 20-25% that were issued in the U.S. from 2004-2006.
• Our sub-prime market isn’t even sub-prime in comparison to the much riskier loans that were made in the US (120% Loan to Value’s, No document Ninja Mortgages). Canada has been much less aggressive in our mortgage product innovation in general.
• Adjustable rate mortgage resets caused many problems stateside as they begin with a low teaser rate and then go up significantly at a determined time adding hundreds or thousands of dollars in some cases to a families monthly debt-load. The closest comparison in Canada is Variable rate mortgages but they get constantly re-priced so that people aren’t caught off guard later.
• Homeowners’ Equity in Canada is at around 70% vs. in the US where it is closer to 46%. Homeowner’ equity in the U.S. was falling long before the current crisis and actually began falling steeply in contrast to Canada in the late 1980’s.
• Investor mortgages were among the first products to default in the U.S. where they account for about 9% of all outstanding mortgages, similar to the UK (9.5%) and Australia (10%). In Canada however they are only about 2-3% of all outstanding mortgages.
• In Vancouver, Canada’s priciest market, prices have gone up about 80% since the mid 1990’s start of the global housing cycle. London England by contrast went up about 270% over this time period. Canada’s house price appreciation was on average significantly lower than the U.S. and much of Europe.

Canadian mortgages are funded, underwritten and enforced in a totally different manner than that of the U.S.

1. Canada’s funding model is completely different from the U.S. The majority of mortgages are held on a balance sheet in Canada with only 24% having been securitized.
2. Further, the majority of securitized totals have been done through CMHC – a crown corporation with explicit government backing – thus avoiding the problems in the U.S. through naturally tighter requirements.
3. Mortgage Backed Securities were not placed in off-balance-sheet structures that were over-leveraged like in the U.S. This is perhaps the most important point, what really caused the problems were over leveraging that occurred after the mortgages were originated.
4. Appraisal standards are generally higher in Canada where appraisers are more likely to low-ball estimates of property value.
5. Unlike many U.S. banks, Canadian banks continue to apply prudent underwriting standards. In other words, they continued to check incomes, verify job status, ask for sales contract’s etc. U.S. underwriting got much more… shall we say, creative.

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