Canada Housing Bubble just finished a report outlining four arguments supporting the position Canadians are protected to a housing bubble similar to the one experienced South of the border. The full article is here, but we summarized it below, highlighting four key differences from the United States:
1. Mortgage Default Insurance. Unlike in the US, all Canadian mortgages with a loan-to-value ratio of 80% or more are backed by mandatory default insurance provided by CMHC, Sagen or Canada Guaranty.
2. Homebuyers in Canada are on the line. In America, if you woke up to find your house had depreciated in value and you, in fact, owed more on your mortgage than your house was worth, you could simply hand over the keys and walk away. In Canada we have something quite different. If you walk away from your home, and the bank sells it for less than your mortgage, you are still on the hook for the remainder. So, Canadians are effectively less motivated to default on their homes.
3. About 30% of the mortgage market has a federal government guarantee. This was introduced in the height of the North American credit crisis, which kept the market functioning as lenders continued to loan money in Canada.
4. Though many Canadians have opted for riskier variable rate mortgages, Canada shied away from sub-prime lending.
One point regularly cited but not included in this article is the number of speculative houses bought in the US. Many Americans were buying second homes in states like Florida and Arizona as investment properties, assuming values would always appreciate. In Canada, the number of homes per person has not followed the same growth in home prices.