Why the US housing market crash didn’t happen in Canada

In a report earlier this year, Royal Bank of Canada chief economist Craig Wright suggested home ownership for a growing number of Canadians has become an impossible dream. That’s certainly true in Vancouver, where the affordability index is at record highs, with the average home price at nearly 10 times the median income.

But perhaps ownership has been oversold as an aspirational goal. As thousands of Americans have discovered, sometimes the dream becomes a nightmare.

In the United States, home ownership wasn’t just a dream, it was held up as an inalienable right. Washington pressured financial institutions to lend money to almost anyone who asked, giving rise to the NINJA mortgage (no income, no job, no assets).

Because mortgage interest was (and still is) tax deductible, homeowners did not bear the full burden of borrowing. Financial institutions turned to the wizards of Wall Street to devise derivatives that might mitigate the heightened risk.

The U.S. government had already sanctioned mortgage-based securities, having set up the Government National Mortgage Association (Ginnie Mae) in 1968 and the Federal Home Loan Mortgage Corp. (Freddie Mac) in 1970 to expand the secondary market for mortgages.

Inevitably, homeowners without the means to repay their debts defaulted on their mortgages and the derivatives based on them, including mortgage-backed securities and collateralized debt obligations, became worthless. Not knowing the extent of exposure to toxic debt, financial institutions became reluctant to lend to each other.

The result was a credit crisis that plunged much of the world into recession.

The housing crash that crippled the U.S. didn’t happen in Canada for several reasons. For a start, more prudent lending practices prevented the emergence of a significant subprime mortgage market. Canada’s regulatory regime acted as a rudder that kept the financial services industry on an even keel. And besides the capital gains exemption on the sale of a principal residence, there is no particular tax advantage in owning a home in Canada.

Measures mistakenly introduced to loosen mortgage lending rules — such as interest-only loans and 40-year amortizations — were quickly reversed, forestalling a flood of overly leveraged households.

Source: Harvey Enchin, Vancouver Sun

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