The Washington Post finally mentions the real difference between the mortgage and home market systems in Canada and the United States in the eighth paragraph of its instructive comparison. Canada’s lending and residential markets have remained relatively healthy, and instead of the deep recession seen in the US over the last two years, our northern neighbors had a relatively easy ride during the same time. Home values have ridden a roller coaster in the US, while Canada has seen a remarkably stable upward trend uninterrupted by the worldwide economic crisis. Post reporter Howard Schneider attributes that to regulation and capital reserve requirements, but the real reason is that no one in Canada used the lending market for social engineering:
Canada, as a major U.S. trading partner, did not escape unscathed from the global downturn. The country also suffered a recession, and its Conservative-led government intervened with tens of billions of dollars in extra spending to boost the economy.
But the experience here was dramatically different from the United States’, and it offers a study in how policy, regulation and consumer behavior combine to create economic conditions that allow homeowners like Fritz to enjoy steady price appreciation, while their U.S. counterparts suffer through years of uncertainty. Despite hope that an economic recovery is taking hold in the United States, sales of new homes in May hit a record-low annual pace of 300,000, undercut by the expiration of a buyer tax credit.
Heading into the crisis, banks here were under stricter rules, forced to set aside more capital than U.S. firms and managed with a more conservative bent. Government agencies such as the Canada Mortgage and Housing Corp. hewed closely to policies in which they supported the housing market by offering mortgage insurance, but unlike Fannie Mae and Freddie Mac in the United States, they were never expected to encourage homeownership as a social or economic end.
And that’s the major difference. Schneider notes that the Canadian residential market seemed sluggish and stodgy while the US market soared through most of the last decade, but that was the effect of government manipulation of the lending market. The US government at first forced and then subsidized the kind of lending and leveraging spree that Canada avoided, not through a regulatory regime as Schneider supposes, but from common sense and a recognition that home ownership wasn’t really the government’s business. Demand skyrocketed in the US, cheap and easy loans proliferated, and people leveraged their equity — all of which was by design of Congress. The crash was inevitable, as it is in all Ponzi schemes when the pyramid party runs out of suckers.
Both the US and Canadian housing markets are acting rationally. The government intervention has left the US with overvalued inventory, and far too much of it still on the market. That means sales have to eventually drop, and that prices have to decline to meet the real value of the property. The Obama administration and Congress have continued intervening to avoid that, but it’s going to happen regardless. The only thing that has changed in these latest interventions is that the government has destroyed capital (now or in the future) to kick the can down the road, rather than allow the capital to generate the kind of real economic growth that could have provided a softer landing for the residential markets.
Schneider offers this rather humorous argument:
Some of the principles underpinning Canada’s performance are now gaining greater acceptance among other G-20 countries — raising capital standards for banks, for example, and being more careful in managing risk. But it may be hard for other governments to replicate the attitude of Canadian consumers.
No, it won’t. Those governments have to stop promising home ownership as an entitlement, and stop strong-arming and subsidizing subprime loans from lenders to unqualified buyers. When governments stop setting those expectations, consumers will get the message quickly, and we’ll stop putting our housing markets on roller coasters.