No Bubbles In Oh Canada!

The WSJ ran this story earlier this week.

http://online.wsj.com/article/SB10001424052748703808904575025100730017666.html

How can you call Canada's housing sector a bubble now when that market never really seriously corrected in the first place? Canada's market never went bust like the US did, those prices did dip but have since moved higher, causing many to fear that a bubble is imminent.

It wasn't the first piece on this line of thinking.

The Cleveland Fed had an earlier piece.

http://www.clevelandfed.org/research/commentary/2009/0909.cfm

Also this piece from Credit Slips which tries to make the point that low rates were not the reason for the housing bubble, and points to the fact that Canada also had low rates but why no bubble?

http://www.creditslips.org/creditslips/2010/02/monetary-policy-and-the-housing-bubble-debunked-1.html

I will have more to say on this particular post real soon.

But, going back to the Canadian Housing Market. Why did the Canadian housing market not feel the same pain as US homeowners? Lets look away for just a moment the effect of lower rates which changes the risk parameters and basic behavioral approach that people have.

I point to these main factors:

Canada had lending standards. Unlike the US where lending standards fell sharply at the start of the decade. Canada never had the non bank lenders that the US had. There was never this model of lend to securitize that existed here in the states. There is mortgage securitization in Canada, but it was never out of control like it was in the US.

Canada has a nationwide standard when it comes to mortgage obligations. This standard is called Full Recourse Mortgages. This just means that if you buy a home, walk away from it, you are still obligated to the entire mortgage debt. This is something called accountability. Many states like California are non recourse states where people can buy homes way above their own pay grade and walk away from the home and the underlying debt. The key word here is obligation, in the states their was no obligation in many states to the underlying debt.

Lastly I believe Canada's single regulatory scheme basically streamlines the laws and regulations. They have laws in Canada and they actually enforce them. We have many regulatory offices and agencies that basically don't do anything, and they can be bought and sold by the lobbyists. I am not saying that laws are broken in Canada and that lobbyists don't exist, but the inmates don't run the asylum north of the border.

These charts below are from Case-Shiller.





As you can see the delinquencies in Canada was pretty stable, while the US delinquencies sky rocketed starting in mid 2006. Also realize that US delinquencies trailed Canada from 1998 through mid 1995. Could it be that the GSE's curtailed their lending activity in 2003 and Wall Street took over the slack? The lend to securitize model was born and soon the lending standards starting in 2003 went into the toilet.

As soon as delinquencies started to rise, Presto! Housing prices collapsed. Subprime mortgages which were the most popular predatory mortgages that Wall Street was packaging accounted for 20% of all mortgages originated between 2004-2006. Why? Because the lack of regulation and an abundance of credit. The credit was just flowing everywhere. Why? Low Rates and lax Fed Monetary Policy. Canada on the other hand originated only some 5% or so to the subprime market. You can't blame the poor for this issue because it was Wall Street that supplying the bullets to this process. This is like blaming kids for doing cocaine instead of blaming the drug cartels.

Also in Canada the mortgage market even in the subprime arena never got involved in the exotic mortgage market. Again, Canada did not have the problem of non bank lenders that created crazy products like Negative AM, Pay Option, and Interest Only mortgages. These products spread like a virus through out the US during the 2003-2006 period. Wachovia and WAMU had the nerve to still underwrite these nit wit products well into 2008.

Canada's housing market was less prone to this virus that was killing the US Market.

I know Canada had low rates as well, but as I pointed out above. The reasons were they didn't have the exotic securitization models that non bank lenders had in the states. This lend to securitize model that was germinating the US Market was a direct consequence of the absurd low rate policy that the Fed was backing.