Similarities between the U.S. housing crisis and the more recent jump in housing prices in Canada have fueled concerns about an impending crisis in the Canadian market.
In Canada, as in the United States three years ago, bidding wars are becoming common, prices and sales are rising at double-digit clips, and interest rates are at record lows.
But key differences separate the Canadian and U.S. housing markets, analysts say, suggesting Canada may be less vulnerable to a U.S.-style market collapse.
The differences include:
* Canadian mortgage interest is not tax-deductible, as in the United States, so there is no tax benefit to holding a large mortgage.
Mortgage deductibility creates an institutional incentive in the U.S. to get and keep relatively large mortgages, and probably to over-invest in housing and home ownership in the first place, said Finn Poschmann, vice president of research at the C.D. Howe Institute, a Toronto-based think-tank.
* The government has never campaigned to boost home ownership among low-income Canadians. In the United States, such a push spurred the subprime lending market. Culturally, policymakers and the public are less likely to argue home ownership is part of a Canadian Dream.
* Lending standards are stricter in Canada, with fewer exotic mortgage products available. Limits include:
- a broad requirement for a minimum 5 percent down payment
- loans larger than 80 percent of the value of a home must be insured by the government-sponsored Canadian Mortgage and Housing Corporation (CMHC)
- amortization, or the length of a mortgage, is limited to 35 years to prevent borrowers from taking on debts that exceed their lifespan
- mortgage terms are typically no longer than five years, meaning interest rates must be renegotiated multiple times during the life of the mortgage, ensuring that rates aren't locked in forever
- banks use common credit standards for loan approval
- interest-only or no-document loans don't exist
- subprime loans in Canada peaked at about 4 percent of the market, versus 33 percent in the United States.
* Canada's big five banks make up the bulk of mortgage lending and rarely indulge in subprime loans. Also,
- banks typically hold mortgages on their balance sheets rather than sell off the loans. That gives the lenders more incentive to ensure credit quality
There has also been a stronger tendency in other markets, including the U.S., to securitize mortgages, where we have tended to hold the assets on our books, said Ann DeRabbie, a spokeswoman at Bank of Nova Scotia, Canada's No. 3 bank.
* Geographically, the colder climate of Canada means fewer boom areas of housing growth, as in the U.S. Sunbelt. Developers have fewer opportunities to lure investors into second homes or winter vacation residences.
* Land transfer taxes are high in some jurisdictions, including Toronto, the nation's largest city. Huge tax bills discourage home flipping for profit.
(Reporting by Andrea Hopkins; Editing by Frank McGurty and Jeffrey Hodgson)