When Canadians visit the U.S., or Americans come to Canada, everything looks familiar but feels somehow different. It's the same in the two countries' housing markets - there are enough similarities that it feels normal, but drill down a little deeper and you'll find that the systems have some fundamental differences.
When the sub-prime mortgage crisis hit the United States and the housing market collapsed, many people assumed Canada's housing market would soon suffer the same fate. That didn't happen. Canada's homeownership rate passed that of the U.S. and the country's prolonged housing boom continued.
As explained by Canada Mortgage and Housing Corp. (CMHC): "New types of 'exotic' mortgages became popular in the U.S. in the years leading up to the economic downtown. These mortgages often featured 'teaser rates' that kept initial monthly payments artificially low, only to have them increase significantly later in the mortgage. Features such as this were never adopted by major Canadian mortgage lenders.
"The sub-prime market did not take hold in Canada to the extent that it did in the U.S., where the vast majority of mortgages were originated by third parties and then packaged and sold to investors who often did not understand the associated risk. Most mortgages in Canada, on the other hand, are originated and retained by institutions whose goal it is to maintain a long-term relationship with the borrower," says CMHC.
The federal housing agency says that banks, trust companies and credit unions in Canada have a broader relationship with their customers than just a mortgage, offering car loans, lines of credits and investments.
TD Economics recently released a report entitled Comparing and Contrasting Canadian and American Consumers. "U.S. retailers have been extending into Canada, while Canadian financial institutions have been moving into the United States," says the report. "But, Canada and America are two very different landscapes and the two nations possess a different customer base. What has almost certainly been confirmed in these ventures is that despite similar cultures and language, Canadian and U.S. consumers are quite different."
The report, by economist Diana Petramala and senior economist Sonya Gulati, says, "Younger Canadians have a homeownership rate that is double that of their counterparts south of the border." It says homeownership is also a key goal for new immigrants settling in a new country, and "the larger share of immigrants in Canada relative to the U.S. contributes to the homeownership rate differences across the two countries."
The soaring homeownership rates in Canada are despite the fact that Canada, unlike the U.S., does not have a policy goal of increasing the rate of homeownership.
Because of this policy, mortgage interest is tax deductible in the U.S. The larger the mortgage, the more interest that can be deducted.
Since no such option exists in Canada, there's more incentive for homeowners to pay down their mortgages quickly. That has resulted in a large gap in the amount of equity Canadians have in their homes versus U.S. homeowners.
During the U.S. housing crisis, many homeowners whose mortgages exceeded the value of their homes simply walked away, leaving the banks holding the mortgages. In Canada, a borrower continues to be responsible for repaying the loan even in the case of foreclosure. "Lenders can take legal action to recoup money from the homeowner if a foreclosed home is sold for less than the amount owing on the mortgage," says CMHC.
In 2013, the 90-day mortgage arrears rate in Canada was 0.31 per cent, while in the United States it was about 1.26 per cent for prime fixed-rate mortgages.
Everything costs more in Canada, from houses to clothing to cars and food. The TD Economics report says, "Canadians would have to spend an additional US$4,000 per year to purchase the same amount of stuff as the average American."
The report says that housing captures three out of five top spending categories in Canada. The major variation is that U.S. household spending on health care is almost double that of a Canadian household, because of the different health care systems.
Canadians "devote a significantly larger share of their budget to housing-related items and services" than Americans, spending about US$2,500 more a year on housing expenses.
"Mortgage payments account for a large chunk of the difference, but household operations (Internet, phone, cable, daycare, etc.) also take a bite out of young Canadian household budgets," says the TD report. "Household operations are the one item that Canadians of all ages pay significantly more for (including those in their prime working age). A case in point, Canada is renowned for its expensive cable, Internet and telephone services. Spending on rent is roughly similar across the two countries for most income and age groups."
However, the report says Americans spend US$200 a year more on more furniture, appliances and electronics, and US$250 more at home hardware stores.