"Finally, the biggest difference is that if a Canadian borrower goes into foreclosure, the bank can and will come after that borrower's assets until the balance is repaid. There is no easy way to walk away. These are full recourse loans. "
Hm, the article suggests that Canadian banks are simply more risk averse. Why is that? Do they fear that their government is too small to bail them out?
That would be the correct reason to be risk averse in a free market society, but I doubt that it's true. Even Ireland managed to bail out its (relatively) excessively large banking sector.
Or is it because there are only six major banks in the mortgage business, practically forming an oligopoly? Oligopolies have less competition. Banks could agree upon less risk-taking, thereby shutting out the 100% LTV market.
In Canada, mortgage interest is not tax deductible. This encourages people to actually pay off their mortgage. What a radical idea! This is another example, of how badly the socialist rot has set in all over America. They have to print stories about Canada, to see how things should be run. In Sweden last year, the government refused to bail out domestic car companies. My how the world has changed!
Canadian banks have been "helped" by the government in the past. The second largest bank (at the time) Canadian Imperial Bank of Commerce, lost over two billion dollars on the Riechmann`s real estate portfolio. At the time, $2 billion was a lot of money. The bank had never actually checked on the Riechmann`s asset levels, and just assumed they could cover the loans. CIBC also had massive legal costs, regarding their business with Enron. There is also a large cost to the Canadian economy, regarding the flight of entrepreneurs. Many new business attempts, are forced to seek capital in the US. Canadian banks do not like new start up businesses. Alexander Graham Bell is on the top of a long list of Canadians, that went south to get their business ideas started. In good times, people complain that Canadian banks do not take enough risks. In bad times, like in the 1930s, people are glad none of the Canadian banks closed their doors.
The Canadian banks were founded by conservative Scotsmen who instilled a culture of fiscal prudence in the Canadian banking industry.
What is interesting is that Canada is lowering corporate tax rates at the same time the U.S. is proposing to raise them. By July 1, 2013 the top corporate tax rate on active business income will be only 25%.
Many small corporations will only pay 15% tax rate on the first $500K of income.
On top of that Canada has introduced legislation that will make it even easier for foreigners to invest in Canada. For example, a foreigner who invests in shares of either a private corporation or a publicly traded corporation will pay no Canadian tax when the foreigner sells the shares unless the corporation derives more than 50% of its value from real property in Canada. Canada is opening its doors to investment at the same time the U.S. is threatening the very existence of a corporation.
This article is not really founded in reality, and in 3 years I think it will belong with the articles praising the American housing market prior to the crash. While there is a certain truth to Canadian banks being more stable, a lot of this is because the system has built-in (back-door) bailouts for the banks; and when the housing market tanks (in the near future) the banks will be bailed out by the Canadian Mortgage and Housing Corporation (CMHC).
The CMHC is a crown corporation which insures up to 75% of the value of a mortgage with as little as 5% down with very lenient standards; and there is no limit to the size of the property, and the CMHC (until a month ago) insured investment properties with the same low down payment requirements. The interesting thing will be what happens if housing values drop by more than 25% or 30% and banks are selling foreclosed properties, because they really have no incentive at that point to sell the property for a fair value being that they have lost (about) as much as they could on the property anyways.
Now, you might be wondering what the likelihood of a 30% price decrease in Canada. The Canadian median house price to income ratio is (roughly) 4.25 right now which puts homes as being (roughly) 40% over valued; and in markets like Calgary, Toronto, and Vancouver the market is much more inflated. Calgary will also be reporting a 40% year over year decline in sales in June (on Friday or Monday) while seeing elevated listing activity, and has a 5.5% rental vacancy rate with property management firms (and much higher with independent landlords); and this massive change in activity is due to the recent CMHC rule change which requires speculators to put 20% down on an investment property.
7 comments:
"Finally, the biggest difference is that if a Canadian borrower goes into foreclosure, the bank can and will come after that borrower's assets until the balance is repaid. There is no easy way to walk away. These are full recourse loans. "
We need some of that in the good old US of A.
Hm, the article suggests that Canadian banks are simply more risk averse. Why is that? Do they fear that their government is too small to bail them out?
That would be the correct reason to be risk averse in a free market society, but I doubt that it's true. Even Ireland managed to bail out its (relatively) excessively large banking sector.
Or is it because there are only six major banks in the mortgage business, practically forming an oligopoly? Oligopolies have less competition. Banks could agree upon less risk-taking, thereby shutting out the 100% LTV market.
In Canada, mortgage interest is not tax deductible. This encourages people to actually pay off their mortgage. What a radical idea!
This is another example, of how badly the socialist rot has set in all over America. They have to print stories about Canada, to see how things should be run.
In Sweden last year, the government refused to bail out domestic car companies.
My how the world has changed!
What we need in the good ole US of A is me with a baseball bat and a "license to beat."
Canadian banks have been "helped" by the government in the past. The second largest bank (at the time) Canadian Imperial Bank of Commerce, lost over two billion dollars on the Riechmann`s real estate portfolio. At the time, $2 billion was a lot of money. The bank had never actually checked on the Riechmann`s asset levels, and just assumed they could cover the loans. CIBC also had massive legal costs, regarding their business with Enron.
There is also a large cost to the Canadian economy, regarding the flight of entrepreneurs. Many new business attempts, are forced to seek capital in the US. Canadian banks do not like new start up businesses. Alexander Graham Bell is on the top of a long list of Canadians, that went south to get their business ideas started.
In good times, people complain that Canadian banks do not take enough risks. In bad times, like in the 1930s, people are glad none of the Canadian banks closed their doors.
The Canadian banks were founded by conservative Scotsmen who instilled a culture of fiscal prudence in the Canadian banking industry.
What is interesting is that Canada is lowering corporate tax rates at the same time the U.S. is proposing to raise them. By July 1, 2013 the top corporate tax rate on active business income will be only 25%.
Many small corporations will only pay 15% tax rate on the first $500K of income.
On top of that Canada has introduced legislation that will make it even easier for foreigners to invest in Canada. For example, a foreigner who invests in shares of either a private corporation or a publicly traded corporation will pay no Canadian tax when the foreigner sells the shares unless the corporation derives more than 50% of its value from real property in Canada. Canada is opening its doors to investment at the same time the U.S. is threatening the very existence of a corporation.
This article is not really founded in reality, and in 3 years I think it will belong with the articles praising the American housing market prior to the crash. While there is a certain truth to Canadian banks being more stable, a lot of this is because the system has built-in (back-door) bailouts for the banks; and when the housing market tanks (in the near future) the banks will be bailed out by the Canadian Mortgage and Housing Corporation (CMHC).
The CMHC is a crown corporation which insures up to 75% of the value of a mortgage with as little as 5% down with very lenient standards; and there is no limit to the size of the property, and the CMHC (until a month ago) insured investment properties with the same low down payment requirements. The interesting thing will be what happens if housing values drop by more than 25% or 30% and banks are selling foreclosed properties, because they really have no incentive at that point to sell the property for a fair value being that they have lost (about) as much as they could on the property anyways.
Now, you might be wondering what the likelihood of a 30% price decrease in Canada. The Canadian median house price to income ratio is (roughly) 4.25 right now which puts homes as being (roughly) 40% over valued; and in markets like Calgary, Toronto, and Vancouver the market is much more inflated. Calgary will also be reporting a 40% year over year decline in sales in June (on Friday or Monday) while seeing elevated listing activity, and has a 5.5% rental vacancy rate with property management firms (and much higher with independent landlords); and this massive change in activity is due to the recent CMHC rule change which requires speculators to put 20% down on an investment property.
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