Saturday, Dec 05, 2009

Why didn't the UK's housing market go bust either?

Cleveland Fed: Why Didn’t Canada’s Housing Market Go Bust?

Despite their many points of similarity, housing markets in the United States and Canada have fared quite differently since the onset of the financial crisis. Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. Both countries had similar interest rates. Conclusions: Canada was “lucky” to be a late adopter of U.S. innovations rather than an innovator in mortgage finance [Question: was the UK an innovator or a follower?] Subprime was much bigger in the US (22% of mortgages) versus Canada (5%); this includes borrowers with poor credit histories and difficult-to-document income sources. Surprisingly, Loan-to-Value ratios didn't differ much between the two countries; but Loan-to-Income ratios did.

Posted by drewster @ 08:17 PM (1318 views)
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1. drewster said...

The story continues:
"One possible critique of this argument is that while Canada has not yet experienced a housing bust, it is likely to experience one in the next year. Indeed, a recent Merrill-Lynch-Canada report noted that Canadian house prices over the past decade closely resemble U.S. house prices with a two-year lag (see figure 1). Based on this, they concluded that Canada was also likely to experience a large decline in house prices over the coming year. Canada’s smaller subprime market share and fewer households with high LTV ratios, however, suggest that the country is less likely to see the rapid increase in defaults that helped trigger the bust in U.S. housing prices. So far the incoming data suggest that the Canadian housing market is likely to experience a housing market slowdown rather than a bust."

Could the same two-year lag apply to the UK?

Saturday, December 5, 2009 08:19PM Report Comment

2. drewster said...

US and Canada house prices graph:

Saturday, December 5, 2009 08:21PM Report Comment

3. mark said...

of course UK will crash, but only after the election

the only thing stopping an outright crash is very low interest rates, these will have to go up after the election

Saturday, December 5, 2009 10:04PM Report Comment

4. John Mcc said...

The Canadians (especially in Ontario) have always been financially more conservative than the US or the UK. We found it very difficult to get a loan of >90% when we bought our first home here in 2003. At the time we could easily have got a 100%+ mortgage in the UK. I realise now that this has protected the market here more than in other parts of the world.

Sunday, December 6, 2009 03:49AM Report Comment

5. crunchy said...

3. mark, Devils advocate, of course....

If prices theoretically (strange market) go up 30% then crash 30% would that not be a crash to keep all happy?

Sunday, December 6, 2009 11:46AM Report Comment

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