Canada's housing market booms while foreclosures still drag on the U.S.; Canada vs. U.S.

Yasmin Denner thinks back to when she bought her first house in Toronto in the 1990s. "I had 15% down, but that wasn't enough. They wanted to know where I'd gotten the money from," says the self-employed IT specialist, recalling Canada's borrowing environment.

Fast-forward 15 years. She and husband, Trevor, have settled in suburbs outside Washington, D.C., in a relatively spacious 3,000-square-foot home.

As the U.S. housing market roared earlier this decade, and credit was easy to come by, Ms. Denner says she saw more than a few neighbours pull up stakes and buy twice as much house as they could afford, only to find themselves in big trouble a few years later when the market went south.

"I have a friend who was at a dinner party at one of these McMansions, something like 6,000 to 8,000 square feet. She asked why it was so cold in the house and was told it was too expensive to heat," says Ms. Denner.

There is something about the way she was raised in Canada that cautioned her not to bite off more house than she could chew.

And that Canadian attitude persisted, even with the lax mortgage rules and tax benefits that allow Americans to deduct the interest on their mortgage from their income.

"We considered a bigger house. Sure, you can write your interest off, but it's not that much money. Still, it's tempting for people here," says Ms. Denner.

While the U.S. market has paid dearly for its real-estate bubble earlier this decade, with an almost three-year slowdown, Canada's housing market is booming. The Canadian Real Estate Association said the average sale price of a home last month was $331,602, a 13.6% increase from a year ago. After bottoming out in January, it took just eight months for the market to bounce back, with sales activity in Canada up 63% from January.

Led by the banks, Canadians are more fiscally conservative than Americans and that has kept the market steadier. But Don Lawby, chief executive of Century 21 Canada, says Canada has also benefited from having a more structured housing market.

As the U.S. housing market was approaching its peak four years ago, many in the Canadian real-estate community were lobbying loudly for U.S.-style breaks such as mortgage-interest deductibility, a popular measure that hardly encourages paying down debt on a home.

"I own a home in the U.S. I get the maximum loan I can get, then I go out and buy a new car, a new boat. But what happens when suddenly my home is worth less? I've got a car, a boat and a house I can't sell," says Mr. Lawby. "People in the U.S. see the value of their home more as an ATM than in Canada."

Mr. Lawby says the banks in Canada deserve a lot of credit for not creating products with low interest payments upfront that give way to balloon payments. No-money-down loans have been banned by Ottawa for government-insured mortgages, and interest-only loans are rare in Canada.

But one of the biggest differences between the two real estate markets is the ability to walk away from your housing commitment in the United States. There, people handed over the keys to their bank as the value of their homes shrank below their mortgage.

Don't try that in Canada, says realestate lawyer Steve Brett. "In the U.S., obviously if you have the ability to walk away there is less of an incentive to stay and tough it out. We simply don't have that here."

Banks in Canada have more recourse. "If you just hand your keys back to the Bank of Montreal, the bank is entitled to take back possession of your property and resell it under the terms of the mortgage for the best price they can get," says Mr. Brett.

But if the best price it can get is less than the mortgage, the bank can take legal action against the owner. That's because most Canadians sign a personal guarantee when they get a loan.

"If [the bank] suffers a loss after they've repaid themselves the principal, the interest, all of the costs including legal fees, real-estate commission and fixing up the property, they are entitled to sue the owner," says Mr. Brett.

And the effects of that can be long-lasting. An outstanding judgment automatically attaches itself to any future property being purchased. A bank can also try to garnishee the borrower's wages.

Will banks actually pursue this route? They did in the crash in the 1980s, when people tried to walk away from their devalued homes. "Walking away from a property isn't a possibility at all if you've got other assets," says Mr. Brett.

John Turner, director of mortgages, Bank of Montreal, agrees walking away from property will trigger an action against you if there is not enough equity in the home to cover a mortgage and associated costs.

Deterrents and a lack of financial incentives are two often-cited reasons Canada avoided a hyper-inflated real-estate maket. Mr. Turner points out that there is also more of an advisory industry in Canada to steer people away from certain products.

"There are more brokerage intermediaries in the U.S. The fiduciary responsibility remains with the banks here in Canada," says Mr. Turner, adding mortgage brokers in Canada act more as a go-between for banks and customers.

Brian Johnston, president of Monarch Construction, says Canada's conservatism has paid off. "I was with a friend [who is living in] Iowa and he was telling me he didn't have a mortgage on his house, but he's Canadian. He's unlike everybody else there who has a big mortgage on their house because it's a tax-planning strategy."

Now that the Canadian market is showing its strength, the calls for tax breaks and other homebuying incentives are likely to quiet down. "If I was sitting in the Canadian Home Builders' Association, I would say don't ask for changes. Because Finance is going to tell you, 'Look what happened in the U.S.' "

The Canadian market is far from perfect. It has had its speculators, and some parts of the country, such as Alberta and Saskatchewan, that have seen price appreciation of 50% over a year have since pulled back. Even so, Marc Pinsonneault, senior economist with National Bank Financial Group, says the pullback hasn't been as dramatic as in the United States and has been much more short-lived.

"Their market was stimulated by exotic mortgage products, and you add it together with everything else and it fuelled house prices more than was reasonable," says Mr. Pinsonneault.

"Clearly, you can say it's not something we've had in Canada."

(prepared by Garry Marr/Financial Post)