The US real estate market witnessed a sharp decline between 2007-2008 as a consequence of the U.S. housing bubble. A few of the factors contributing to the bubble were rapid cash inflow into housing markets in the prior years, lenient lending conditions, and government policies in favor of homeownership. After the subprime meltdown, Americans became more wary of being involved in the real estate market, and continue to wonder how Canada has been able to sustain real estate growth over the last 20 years. Canada’s well-kept secrets include high rates of immigration and immigrant demand for housing, shorter mortgage terms, variations in consequences for mortgage defaulters, and differences between the Canadian and the U.S stock markets that cause real estate to be a more attractive investment option.
What makes real estate in Canada different from the U.S?
Due to the subprime mortgage crisis, where a sharp decline in home prices post-collapse of the housing bubble led to several mortgage delinquencies, foreclosures and devaluation of several housing-related securities, and the ensuing recession, many Americans were amazed to see that their northern neighbor, Canada, continued to flourish with a hot real estate market. The stability of the Canadian real estate market has prompted questions; chiefly about what differentiates both real estate markets.
These four factors differentiate the Canadian and U.S real estate markets:
- The impact of high rates of immigration into Canada
- Mortgage term differences
- Differences in mortgage default consequences between the US and Canada
- Stock market differences and lack of other attractive investment options
Impact of immigration on the Canadian real estate market
The Canadian real estate market, especially in areas like Toronto and Vancouver, has become a hotbed in real estate chiefly because of a massive inflow of immigrants who need housing and who predominantly invest their savings in real estate. For most Canadian immigrants, owning a property is high up on their priority list. This was confirmed by a Royal LePage 2019 newcomer survey that showed how 1 out of every 5 homebuyers in Canada in 2019 were immigrants. It also estimated that over 680,000 home purchases would be made by newcomers within the next 5 years. This has created a high demand for properties and will continue to fuel the real estate market in Canada for the next decade.
Mortgage term differences
In the United States, 90% of mortgages have a fixed term of about 30 years. In Canada, mortgage terms are much shorter with the majority being 5-year terms, making them much more sensitive to interest rate changes as the mortgages need to be refinanced at the end of every term. Due to the recent lowering of the benchmark rate by the Bank of Canada, this has created additional interest in real estate investment due to the lower costs of borrowing. Unlike US investors, who may have their mortgages already fixed at high-interest rates, the increased frequency of refinancing allows Canadian investors to quickly react to the better conditions provided by lower rates.
Fewer consequences for mortgage defaulters in some US States vs most Canadian provinces
Many states in the US have fewer penalties for defaulting on a mortgage than most Canadian provinces. In some states, “deficiency judgment” is not allowed, which means the lenders can’t sue to get the difference between the fair market value of the property and what the defaulter owns on the mortgage. This can also be called a “non-recourse mortgage”. For example, if someone defaulted on their mortgage in Arizona, they could just hand over the keys to their lender and leave without any danger of creditors coming after their other assets, even if they owed more on their mortgage than what their home was worth. During the Great Financial Crisis, many homeowners in the US were overleveraged and went underwater on their mortgages or lost their jobs and were unable to keep up with their mortgage payments. Many of them simply walked away from their homes. While there were risks to doing this, they would still retain a number of rights, including ample notice before repossession of their homes, fair valuation, realizing the balance on proceeds of house sale.
This is not the case for the majority of the population in Canada. Only Saskatchewan and Alberta offer non-recourse mortgages, with full-recourse mortgages being the norm in all other provinces. Defaulting on such a mortgage would leave you responsible for covering the remaining balance on your mortgage, especially if the house’s fair market value or sale price was less than the amount remaining. Moreover, mortgages in Canada are all subject to a mortgage stress test, which has to be passed before the mortgage is approved. This means that borrowers are much less likely to default on their mortgages even in tough times, and prevent any waves of selling similar to those that occured in the US during and after the GFC.
Differences in US and Canadian stock markets
There are fundamental differences between both stock markets that make Canadians more inclined to invest in real estate. The US stock market has far more companies in more diverse industries, which has led to major benefits including a better historical return and much higher market liquidity.
The Canadian stock market, on the other hand, is mainly centered around natural resources, utilities, and financial institutions that often yield lower total returns than growth industries like technology companies in the US. If Canadians want to invest in the US, they face foreign exchange risks due to the volatility in the exchange rate between the US Dollar and the Canadian Dollar, not to mention a host of fees and additional taxes. Subsequently, real estate can be a much more attractive investment option for Canadians whereas Amercians have alternative options.
For decades, real estate has been a solid investment for millions of people around the globe, and this is particularly true for countries like Canada and the United States. However, what makes the Canadian real estate market so attractive includes factors like the surging demand from high immmigration rates, mortgage term differences that increase investment flexibility, stiffer consequences for mortgage defaulters, and differences in the stock market that lead to fewer alternative investment options for Canadians.