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Not “O Canada,” the national anthem, or “Au Canada,” which is where the Quebecois say they live, but “Oh, Canada.” This week, we venture to the Great White North, or as we Yankee housing market geeks like to call it, “America’s Control Group.”
The Canadian market is a lot of fun to study. Its economy is heavily integrated with ours, and its citizens lead a substantially similar lifestyle to those of us south of the border. While their football players may only have 3 downs to move 10 yards, they at least agree that the sport involves shoulder pads, helmets, and an oblong ball, rendering its markets more aptly comparable to ours than say, Europe’s.
The one stark difference between our housing markets is the way that home ownership is financed. That is, Canada suffers from a conspicuous lack of Government Sponsored Entities (GSEs) to underwrite their 30 year fixed rate mortgages. As a result, Canadian borrowers do not generally HAVE 30 year fixed rate mortgages.
In Canada, mortgages typically have a 5 year term, requiring homeowners to repeatedly refinance their loans throughout their ownership. Without their own Frederique Mac and Florance Mae hoovering up long-dated paper, their mortgage market has organically coalesced around the features we Americans typically associate with commercial real estate finance and CMBS.
There is a strong argument that this is what saved Canada from the finance-driven boom and bust in the mid-aughts.
With the exception of a commodity-driven mini-boom in oil-rich Alberta shortly after the crisis, Canada experienced very little volatility in either direction during that cycle.
That background makes the current situation in Canada that much more interesting. That is, for those who haven’t been paying attention, prices in Canada’s hottest markets have grown faster than anything we have seen in the US during the recovery.