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Why we’re not like the States

3 June 2012

It can be very hard to take a look at the housing market in Canada and not at least be tempted to compare it with that of the States’ just before they crashed and fell into a huge recession. Changes have been made to mortgages in Ottawa to try and prevent the same thing from happening here, and Canadian consumers are continuously being warned about taking on too much consumer debt, including HELOCs. But, says some Canadian economisst, we shouldn’t be worried about mimicking our friends South of the border; and that’s simply because our situation is very, very different from theirs.

Derek Holt, vice president of Scotiabank, faced a group of global investors last week to argue his points from his report “Canadian Housing in a Macro Context.” Within that report, he outlines the different reasons why in Canada we shouldn’t fear the same collapse the States saw. His reasons: the market is already starting to correct itself, the condos that are being built are necessary, stronger household finances, a diversified housing market, and the simple fact that we have better banks. Last week, Mr. Holt presented that report with two other economists, Dov Zigler and Adrienne Warren.

While there’s no doubt that Canada’s housing market has been a seller’s market for the past several years, that’s starting to balance out, the economists say. As homeowners and homebuyers start to prepare themselves for higher interest rates, fewer buyers are on the market and so, sellers no longer have the final and only word on properties. The longer amortization periods and the larger down payments that Ottawa has already required be put into place, are just two other reasons why the market is starting to normalize itself.

But what about all those condos? A quick look at Toronto or Vancouver will tell you that Canadians are condo-crazy; and that’s true, according to Mr. Holt’s report. The economists don’t believe that our condo craze has much to do with overeager builders and developers, simply the fact that these buildings are where the people want to be because they’re more affordable and because they’re better suited for today’s lifestyle – especially in the big cities. Plus, the economists add, condos are the property of choice for most investors.

Condos and housing markets aside though, the economists say that it really all boils down to our household finances. They’re simply better than they were in the States before, during, and after their crash. Canadians have more cash flow and more importantly, more home equity than American homeowners did when their market went under. Because of this, Canadian homes are not going to sink underwater – even if interest rates rise and housing prices drop. Because we have a comfortable amount of equity in our homes, we’ll also have plenty of cushion room.

Lastly, Canada’s banks are much stronger than they were in the States. South of the border the banks were partaking in shadow banking, and giving mortgages to just about anyone that asked for one. This simply doesn’t happen here, and the revolving door of financing also isn’t put into practice in Canada.

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