Blog by Mark Longpre

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Canada Vs US - the new Realty

Yasmin Denner remembers the tough questions when she bought her first house in Toronto in the 1990s.

“I had 15% down but that wasn’t enough. They wanted to know where I’d gotten the money from,” said the self-employed IT specialist with a laugh as she recalled Canada’s borrowing environment.

Flash forward 15 years. She and her husband Trevor moved to the United States, settling in the suburbs outside of Washington D.C. where they bought a relatively spacious 3,000 square foot home for their future family of three.

As the U.S. house market roared, and credit was easy to come by, Ms. Denner said she saw more than a few neighbours pull up stakes and buy twice as much house only to find themselves in trouble a few years later when the market went sour.

“I have a friend who was at a dinner party at one of these McMansions, something like 6,000 to 8,000 square feet. She asked why it was so cold in the house and was told it was too expensive to heat,” says Ms. Denner.

There is something about the way she was raised in Canada that told her not to bite off more house than she could chew, even in the face of lax mortgage rules and tax benefits that allow you to deduct the interest on your mortgage from your income.

“We considered a bigger house. Sure you can write your interest off but it’s not that much money. Still it’s tempting for people here,” says Ms. Denner, adding most of the transplanted Canadians she knows remained conservative as the American housing market exploded.

While the U.S. market has paid dearly for its rapid with an almost three-year slowdown, Canada’s housing market has bounced back in a mere eight months. The Canadian Real Estate Association said the average sale price of a home last month was $331,602 last month, a 13.6% from a year ago. After bottoming out in January, sales activity in Canada is up 63% from the low.

Perhaps Canadians are inherently more conservative than Americans and that has kept the market steadier but Don Lawby, the chief executive of Century 21 Canada, says we also have a more structured housing market.

As the U.S. housing market was approaching its peak four years ago, many in the Canadian real estate community were lobbying loudly for U.S. style breaks like mortgage interest deductibility — a popular measure that hardly encourages you to pay down the debt on your home.

“I own a home in the U.S. I get the maximum loan I can get, then I go out and buy a new car a, new boat. But what happens when suddenly my home is worth less. I’ve got a car, a boat and a house I can’t sell,” says Mr. Lawby. “People in the U.S. see the value of their home more as an ATM than in Canada.”

Mr. Lawby says the banks in Canada deserve a lot of credit for not creating products with low interest payments up front that eventually give way to balloon payments. No money down loans have been banned by Ottawa for government insured mortgages and interest-only loans where you pay no principal are rare in Canada.

But one of the biggest differences between the Canadian market and the U.S. market is the ability to walk away from your housing commitment. In the U.S. people have handed over the keys to their bank as the value of their homes has shrunk below their mortgage.

Don’t try it in Canada, says real estate lawyer Steve Brett. “In the U.S. obviously if you have the ability to walk away there is less of an incentive to stay and tough it out. We simply don’t have that here to the same extent.”

What would have happened in Canada if the market had not improved and prices declined say 25% — something that occurred in Toronto in the late 1980s?

“If you just say hand your keys back to the Bank of Montreal, the bank is entitled to take back possession of your property and resale it under the terms of the mortgage for the best price they can get,” says Mr. Brett.

But if the best price they can get is less than your mortgage, you have a problem because most Canadians sign a personal guarantee when they get a loan. “If [the bank] suffers a loss after they’ve repaid themselves the principal, the interest, all of the costs including legals fees, real estate commission and fixing up the property, they are entitled to sue the owner,” says the lawyer.

Once the bank has a judgement against you saying you owe them money, it will follow you forever. Try getting another mortgage with an outstanding judgement. The judgement automatically attaches itself to any future property you buy. With a judgement against you, the bank can also try and garnishee your wages.

But what’s the reality? Would the banks actually pursue this route? That’s exactly what happened in the 1980s. “Walking away from a property isn’t a possibility at all, if you’ve got other assets,” says Mr. Brett.

Bank of Montreal director of Mortgages John Turner agrees walking away from property will trigger an action against you if there is not enough equity in the home to cover a mortgage and associated costs.

It’s not just the rules in place, Canadians don’t want many of the products found in the United States. “We’ve done some research and Canadians are more conservatives than our cousins south of border. we are wired differently,” says Mr. Turner. “Our products are different because that’s what people want.”

He admits if Canadians were offered more exotics mortgage products, there would be some interest. But Mr. Turner adds there is more of an advisory focus here to steer people away from certain products. “There are more brokerage intermediaries in the U.S. The fiduciary responsibility remains with the banks here in Canada,” says Mr. Turner, adding mortgage brokers in Canada act more as a go between for the banks and customers.

Even some in the real estate industry admit Canada’s conservatism has probably paid off. Brian Johnston, president of Monarch Construction, says it’s probably been a blessing.

“I was with a friend [who is living in] Iowa and he was telling he didn’t have a mortgage on his house but he’s Canadian. He’s unlike everybody else there who has big mortgage on their house because it’s a tax planning strategy,” said Mr. Johnston.

Now that the Canadian market is showing much better consistency will it quiet down demand for changes in Canada that makes buying a home easier? “If I was sitting in the Canadian Home Builders’ Association I would say don’t ask for changes,” says Mr. Johnston, “because finance is going to tell you, ‘looked what happened in the U.S.’.”

Don’t get the idea, the Canadian market is perfect. It has had its speculators. Some parts of the country like Alberta and Saskatchewan have seen price appreciation of 50% in those markets over a year and have pulled back since. But Marc Pinsonneault, senior economist with National Bank Financial Group, said it has hasn’t been as dramatic and has been much more short-lived.

“Their market was stimulated by exotic mortgage products and you add it together with everything else and fueled house prices more than was reasonable,” says Mr. Pinsonneault. “Clearly you can say it’s not something we’ve had in Canada.”

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