Think of all the Canadian Snowbirds who winter in Florida, a paradise which is to them a “foreign” country—and how many things that between the two countries seem so similar but are somehow different. Fahrenheit verses Celsius, Canadian Healthcare verses our “whatever plan”; even the language is a bit different, eh?
Look for a moment at the two housing markets. There are enough similarities that it feels normal, but when you look a little deeper you'll find that the two systems have some fundamental differences.
When the sub-prime mortgage crisis hit the United States and the housing market collapsed, I owned a real estate franchise whose headquarters was based in Toronto, and I assumed Canada's housing market would soon suffer the same fate. That didn't happen. Canada's homeownership rate passed that of the U.S. and the country's prolonged housing boom continued. Prices kept going up and stayed strong.
Back then; new types of 'exotic' mortgages were offered in the U.S. in the years leading up to the economic downtown. These mortgages often featured 'teaser rates' that kept monthly payments artificially low, only to have them increase significantly later in the mortgage. Of course everyone knew they could always refinance—and nobody thought their home value would ever drop. Major Canadian mortgage lenders never adopted features such as this.
That sub-prime market never took hold in Canada. In the U.S. the vast majority of mortgages were originated by third parties and then packaged and sold to investors who often did not understand the associated risk. In Canada, on the other hand, most mortgages are originated and retained by the banks and institutions whose goal it is to maintain a long-term relationship with the borrower. (Like the old days here—think 1950 to about 1970).
Banks, trust companies and credit unions in Canada have a much broader relationship with their customers than just a mortgage; they are the financial experts and they offer investments, lines of credit and more.
And even though the countries seem so similar, their individual consumers are quite different. Younger Canadians have a homeownership rate that is double that of their American counterparts. Homeownership is also a key goal for new immigrants settling in Canada and contributes to the broad homeownership rate differences across the two countries.
The U.S. offers tax breaks to homeowners with the idea that a tax break will increase homeownership, Canada, does not have a policy goal of increasing the rate of homeownership and offers no such tax breaks. In the U.S. mortgage interest is tax deductible and so the larger the mortgage, the more tax benefit (interest that can be deducted.)
But because no such option exists in Canada, there's more incentive for Canadian homeowners to pay down their mortgages quickly. That has resulted in a large gap in the amount of equity Canadians have in their homes versus U.S. homeowners. Even if the Canadian homes lose value, homeowners continue to have much more equity.
During the U.S. housing crisis, many Americans whose mortgages exceeded the value of their homes simply walked away, leaving the banks holding the mortgages. In Canada, walking away is not an option. A borrower continues to be responsible for repaying the loan even in the case of foreclosure. In Canada, a foreclosure does not relieve the homeowner of the mortgage debt. Lenders can take legal action to recoup money from the homeowner if a foreclosed home is sold for less than the amount owing on the mortgage. (Short Sales)
Canadians spend a significantly larger share of their budget on housing-related items and services than Americans, spending about US$2,500 more a year on housing expenses.
Dane Hahn is a real estate professional with Sarasota Associates in Venice, He can be reached at 941-681-0312 or by email at email@example.com. See him on the web at www.danesellsflorida.com