Friday, May 08, 2009

Banks and Housing Markets: Canada vs. U.S.

From the mid-2006 housing price peak in the U.S. (Case-Shiller Composite-20 Index, data here), home prices have fallen by about 30% (see chart above) through February 2009. From the mid-2008 peak in Canada (Teranet/National Bank of Canada National Composite Index, data here), prices have fallen by only 7.4% through February. Although Canada home prices may continue downward (along with U.S. home prices), it would appear so far that there was a much bigger housing bubble problem in the U.S. than in Canada.

Likewise, there was a much more significant banking crisis in the U.S. than in Canada, see bottom chart above of the S&P US Bank Index and the S&P Canada Bank Index, from January 2000 to May 2009 (data from
Global Financial Data, paid subscription required). Both bank indexes peaked about the same time in early 2007, but the U.S. bank index crashed by 80% through early 2009, compared to the 40% drop in Canada's bank index over the same period. Year-to-date, both bank indexes are up about 30%.

Nick Rowe, via Marginal Revolution, comes this list of why Canada's banks are special, or at least different enough from US banks to explain the differences above in the recent housing market and banking problems:

1. Canada has never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada, and it doesn’t matter if a local housing market goes bust. (This was also a major difference during the Great Depression when about 10,000 banks failed in the U.S. vs. almost no bank failures in Canada.)

2. Canada never had Glass-Steagall restrictions separating commercial banking from investment banking, and the investment banks in Canada joined the retail banks some years ago.

3. Canada doesn't have mortgage interest deductibility for income taxes. So paying down your mortgage in Canada is a tax-free investment, and most people want to pay down their mortgages.

4. Except in Alberta, mortgages in Canada are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

5. If a Canadian investor wishes to take some risk, the New York-based banks may be the most efficient means of doing that (added by Tyler Cowen).


At 5/08/2009 9:04 AM, Anonymous Andrew said...

I read this very differently. The home price indices both start in 2000. The Canadian one actually goes higher than the US one. It shows clearly that the Canadian house boom was/is larger than the US one. The only difference is the time lag. Canada is lagging by about 1 - 2 years. The banks in Canada haven't been through the real estate crisis yet. Their shares may underperform for some while. Their shares have been rising on falling volume. This is opposite to the US banks. To be totally consistent, it is more likely from the charts that the smug Canadians simply haven't had their "just desserts" yet. Remember also that our stock market is based mostly on energy/resources/materials and as such depends largely on global growth, not Canadian growth.

At 5/08/2009 9:10 AM, Blogger Hot Sam said...

This comment has been removed by the author.

At 5/08/2009 10:38 AM, Anonymous gettingrational said...

Could the relatively small drop in bank and housing values be a result of higher equity positions by homeowners in Canada? Is the higher equity ratio in Canada a function of immigrants having to bring in to Canada capital (I think$200,000)? Thus a lot of this imported capital goes into home ownership and a greater stability in the financial system.

At 5/08/2009 12:05 PM, Anonymous Anonymous said...

Andrew: "just desserts"? What do you mean by this statement? The U.S. Stock market is mostly based in energy/resources/materials? Wasn't it the financials that led the market down? Financials based on loose standards of making renters into terrible homeowners? How much energy/resource/materials does the US have compared to Canada? Watch the Canadian v. US Dollar chart and you'll see who has the resources now that the globe is wanting them again.

At 5/12/2009 2:35 PM, Anonymous Toronto Condos said...

Well, we all know where this crisis started. And the real estate had to drop the most in the US since they're mortgage policies we're ridiculous. The graphs don't show anything I wouldn't expect. The list by Mr. Rowe is pretty accurate I'd say and says it all. Thanks for sharing,

take care, Elli

At 5/31/2009 12:55 PM, Anonymous Matt said...

I never realized how hard hit the US real estate market was. I heard... but its good to see some facts relating to it.

At 8/14/2009 11:08 PM, Anonymous Anonymous said...

gettingrationa, the immigrants have to bring $10,000 so that is nothing. In Quebec is even less than $10k.

At 1/04/2010 7:23 PM, Anonymous Jeff O'Leary said...

I disagree that the Canadian and US housing are the same. Unlike in the US, Canada has much tighter restrictions on lending and the government is currently taking measures to ensure the housing market does not over heat.


Post a Comment

<< Home