Sunday, June 20, 2010

Canada 1 USA 0: the tale of two housing markets

Today the Associated Press asserts, correctly, that Canada's economy is now the envy of the world.  However, the AP misses the big picture as to why.  Take a look at this graph, from the Canadian economics blog Worthwhile Canadian Initiative, showing income-adjusted housing prices in the US and Canada:

There was no housing bubble in Canada.
All the banking regulation in the world won't make me pay more or less for a house unless it changes the size and terms of the mortgage loan I can get. In the USA, our government enacted a major housing stimulus in the 1990s (via Fannie Mae, Freddie Mac, and the Community Reinvestment Act), getting banks to lend people more and more money at lower and lower rates. This caused the decade-long housing bubble, which took our economy down when it inevitably burst. The Canadian government never enacted a housing stimulus, so their housing market remained stable. Canada had no bubble to burst, so they recovered quickly from this recession. That is the lesson we should learn from Canada -- not, as the article suggests, that their centralized and highly-regulated banking system is somehow superior to our own.