Why Is Canadian Housing and Banking Stronger than the 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%.

From 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).

Comments

[john s. gordon:]

banks in canada are run by responsible professionals.
in the u.s.a there has been no adult supervision of the sandbox activities during 2001-08.
> jack

May 10 08:19 AM

[Brent Forsland:]

Canadian banks got involved in the prolific and irresponsible lending practices that were the standard of the United States banking industry throughout this decade. The lack of foreclosures and write downs as a result is the reason for the relative strength in these sectors you are seeing in our neighbors to the North.

May 10 09:30 AM

[Brent Forsland:]

Canadian banks never got involved in the prolific and irresponsible lending practices that were the standard of the United States banking industry throughout this decade. The lack of foreclosures and write downs as a result is the reason for the relative strength in these sectors you are seeing in our neighbors to the North.

May 10 09:35 AM

[phil from E...:]

Canada's economy is largely resource (oil, gas and mining) driven. Through mid 2008 resource prices were still high. Let's see if things are really different or if Canada was just a latecomer.

May 10 10:47 AM

[campo:]

The most dangerous thing for the Canadian housing market is high interest rates. Unlike the US, where a mortgage has a fixed rate with a thirty year amortization, Canadian mortgages are typically 25year amortization with a term of 3-5 years. Recent years have produced low, stable rates, but a radical up tick in interest rates like what happened in the early 1980's would be disastrous for Canadian homeowners.

May 10 11:55 AM

[notsosmart:]

not as many scoundrels & crooks up there.anybody heard of any canadian ponzi's? down here its all ponzi/casino & those folks are now in gov.how did bush raise a $100 million in a 100 days for his spin library? take a guess.

May 10 01:39 PM

[Homer II:]

Lets look at Canada's public education system.. is it run by socialist union labor? Do they teach personal responsibility or do they teach that the Government will always HELP you if you don't feel like working? Are teachers more interested in their renumeration or are they focused upon teaching their future workers, parents, leaders?

I suspect that the education system in Canada has it right, and that is why they, as a people, have better control of their impulses. I have never been there, yet I find alot to admire about Canadians.

May 10 04:41 PM

[Teutonic Kn...:]

The Canadian educational system does not have the SAT, ACT, GRE, GMAT and all that. Here in the U.S. of A. there seems to be more glitz oriented - there is the Big 3 HY&P, the Little 3 WAW etc., that is more akin to a class/elite structure mentality.

In Canada, as I know it, if you boast about your college as an equivalent Ivy-League school in a job interview, the interviewers would frown upon you. It seems to me to be of a more socialist and even-handed atmosphere where everyone, every college, is about the equal, and no one should, and would brag about where he/she is graduated from. Of course there are exceptions like the UCC but few people pay alot of attention to those minorities.

May 10 06:27 PM

[mbkelly75:]

The Canadian financial system that has NOT (by law) partisipated in the questionable activities that US Banks and Mortgage Houses were in is another reason the Canadian Dollar is gaining on the US Dollar. I hold stocks that pay dividends in Canadian Dollars - not only as a good investment - but as an inflation hedge.

May 10 06:48 PM

[KIT:]

On May 10 01:39 PM notsosmart wrote:

> not as many scoundrels & crooks up there.anybody heard of any
> canadian ponzi's? down here its all ponzi/casino & those folks
> are now in gov.how did bush raise a $100 million in a 100 days for
> his spin library? take a guess.

Lets not forget a Canadian Rip-off called BREE-EX 3.5 billion non existent gold mine. CM had to take a big writedown on it. All the other banks had a hit from it too. 15 years later no jail time for anyone.............. Americans throw money from Helicopters we throw geoligists. Google the story

May 10 11:22 PM

[candooman:]

I lived in Canada in the 60's. No surprise they have much less foreclosure problems.

The differences I found then were (I do not know if this is still true today):

1) Universities throughout Canada were almost equal in quality. I worked with graduates from differnt universities and the quality were the same -- all good. I did not encounter a single engineer from a diploma mill like here in the US.

2) People were considerate and polite regardless of whether they finished high school only or college. I attribute this to the quality of home training and good elementary and high schools. Boistrous behavior did not exist among Canadians. The few times I witnessed it usually was of an American who came over to Canada for a short visit. [Americans and other foreigners who lived there long enough changed their ways soon enough....I did, as well as all my other friends.]

Just these two differences alone explains much of the differences between how business behave in the US and Canada. One of the first engineering assignments I was given was to eliminate the polution and waste being generated by the plant I worked at. This was long before the EPA was formed in the US. This is just one example of good corporate behavior practiced there.

May 11 10:53 AM

[KIT:]

On May 11 10:53 AM candooman wrote:

> I lived in Canada in the 60's. > The differences I found then were (I do not know if this is still
> true today):
>

I sum up the difference as..... In America its me first in Canada its me too....... Canadians will suffer any inconvenience as long as all do. In a land were isolation, cold and food shortage can kill Canadains are reluctant to make enemies and are repulsed by the " Burning bridges to light the way forward " offen see in Americas policies to th rest of the world.

May 11 11:05 AM

[Keith Sharp:]

The top graph on housing prices is (probably accidentally) misleading. At first it looks as if Canadian prices soared as much as US house prices. But check the axes. In fact Canadian prices almost doubled and US prices tripled.

Keith Sharp

May 11 12:01 PM

[Donald Ingram:]

KIT, candooman; I'm Canadian, and thank you both for your kind words. I think most people think we are boring and conservative. To some extent this is true, but we still have fun - Bob and Doug MacKenzie comes to mind. The big reason we have weathered this economic storm so well so far, is that we are only one tenth the size of the States. 30 million versus 300 million people. Our smaller size gives us a moral sense to "do the right thing", because there is also a fear of shame and being ostracized by society. We have that need to belong. This carries over into business dealings for the most part.

May 12 11:47 PM