Despite prevailing fears that Canada’s overheated housing markets are susceptible to a catastrophic meltdown similar to the U.S. subprime mortgage crisis a decade ago, an industry analyst pointed at the significant differences between the two countries’ situations that make a crash unlikely.
In a piece for The Motley Fool Canada
, columnist and industry observer Matt Smith said that the undercurrent of paranoia in most doomsayers’ predictions is unfounded.
“Not only is the degree and type of regulation substantially different, as is the structure of mortgages, but the exposure of the banks is minimized through the use of mortgage insurance,” Smith wrote. “Even if there was a protracted slump in housing prices, it is highly unlikely that it would take the banks to the brink of financial collapse.”
Smith cited the absence of subprime mortgages in the Canadian system as the main factor preventing a U.S.-style collapse.
“[The] primary cause of the U.S. housing crisis was the ease with which people could borrow to buy a home regardless of their credit worthiness, income, or assets,” Smith explained. “As a result, when U.S. housing prices began to decline, a large number of borrowers were unable to refinance their mortgages, causing existing mortgages to be reset to higher interest rates, which triggered a sharp increase in delinquencies.”
According to Smith, this is an impossible eventuality in the Canadian system as it is right now because of far tighter lending regulations, with subprime mortgages comprising a miniscule 5 per cent of all mortgages in Canada at present.
In addition, Canadian banks’ exclusive preference for providing recourse loans has essentially created a safety net that would allow financial institutions to go after delinquent consumers, very much unlike what happened in the U.S. system.
“[U.S.] borrowers who found themselves in difficultly could walk away from their home and related debt, even if the value of the property was not sufficient for the lender to recoup the full value of the loan. This deepened the losses the banks were exposed to, especially in a market where prices were falling rapidly,” Smith stated.