One humiliating part of the meltdown of our banking system has been the relative health of Canada’s banks. They avoided the huge real estate boom we went through, and subsequently avoided the mortgage meltdown and nosedive in housing prices. How’d they manage that?
The Washington Post reports that strict standards on mortgage lending and tougher default rules helped. In Canada, it’s much tougher to walk away from your mortgage. But what probably helped most of all is that Canada didn’t fall for the home ownership hooey that the US government adopted as its national policy. In fact, in Canada you can’t even deduct mortgage interest!
Strict rules also govern mortgage lending. By Canadian law, any mortgage that will finance more than 80 per cent of the price of a home must be insured. Two-thirds of all Canadian mortgages are insured by the quasi-governmental Canadian Mortgage and Housing Corp. As a result of the tough standards for insurance, “people tend not to get mortgages they cannot afford,” Gregory said.
Defaulting on a loan is also more difficult in Canada than the United States, Gregory said. “You can’t just drop off the keys and walk away.”
For Canada’s seven biggest banks, the percentage of mortgages at least three months in arrears was 0.27 per cent in July, close to historic lows, according to the banking association. Also, few Canadian banks got caught holding large numbers of toxic American mortgages.
Another difference is that in Canada, mortgage interest is not tax-deductible, making it harder to buy a house. As a result, Canada did not have as strong a construction surge as the United States did during the boom years, and thus does not now have a big oversupply.
People do not take out mortgages just for the tax break. In Canada, “a mortgage is seen as something you want to get rid of as fast as possible,” said Peter Dungan, an economist with the Rotman School of Management at the University of Toronto.
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