Aside from the spill-over effects from the US economy, Canada has not suffered nearly so much from the current recession and did not experience either the huge housing bubble or the big housing bust seen in the US. James MacGee has pointed out that Canada escaped the seriousness of the US financial crisis largely because of its more conservative mortgage insurance and regulations of financial institutions.
The Canadian market lacks a counterpart to Freddie Mac and Fannie Mae, both of which played a significant role in the growth of securitization in the U.S. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles.
Finally, as noted above, the fact that the government-mandated mortgage insurance for high LTV loans issued by Canadian banks effectively made it impossible for banks to offer certain subprime products. This likely slowed the growth of the subprime market in Canada, as nonbank intermediaries had to organically grow origination networks. [also, see this video of MacGee commenting on the rising house prices in some Canadian markets (h/t Glendon)]
With these differences, I have to wonder whether the Canadian housing market really needs more regulation or control to head off future housing bubbles and busts. And yet Canada's finance minister, Jim Flaherty seems to think Canadians need even more protection from themselves. From the Globe and Mail,
Policy makers are concerned homeowners will take on more debt than they'll be able to afford when interest
ratesrise again, possibly leading to a painful correction later.
The Bank of Canada has vowed to keep lending rates low into the middle of next year, limiting its options for taking the pressure off a hot market.
But since the federal government dictates rules around down payments and amortization periods, it can effectively dampen the housing market without increasing borrowing costs for businesses.
I.e., the gubmnt would increase credit rationing rather than adjust lending rates. But the premise here is that gubmnt officials can
- recognize a bubble
- do something about a bubble
- that won't be worse than the effects of the bubble
- and do so in a timely fashion