Blowing bubbles: Why Canada didn’t pop like the U.S.
Overview
Everyone remembers the Molson ad in which a guy stepped on stage and proceeded to rattle off what makes a Canadian distinctively Canadian in a crescendo of statements that ended in thunderous applause from the audience. We are both proud and a little embarrassed that we are seen as polite, conservative, and responsible. However, those are the traits that served our commercial real estate industry well in the aftermath of the economic crisis, and saved us from the bottoming-out that is still occurring south of the border. A little over 18 months have passed since the great financial meltdown, which was precipitated by the bankruptcy of Lehman Brothers and the U.S. Government takeover of AIG, Freddie Mac, and Fannie Mae. U.S. commercial real estate is still struggling. There is a "vulture market" for downtown Miami condos that are being sold for cost after entire towers were left vacant for months. The 17% U.S. office building vacancy rate is the highest it has been in 16 years. Pundits predict that, by the end of 2010, half of all U.S. commercial real estate financing will be underwater when existing financing becomes due for renewal. While Canada didn't get by unscathed, it has shown faster and stronger signs of recovery. Practically every street corner in downtown Toronto seems to have a condo or office building construction site that is in full swing. Despite record low interest rates, new homebuyers tend not to be highly leveraged. Government policies and strict lending policies have helped to prevent a "boom, bust" marketplace. In my opinion, the U.S. succumbed to a "Looters in Gucci Loafers" mentality, whereas Canada triumphed in a "Revenge of the Nerds". The following summarizes my thoughts on the great divide between the U.S. and Canada in terms of commercial real estate.
| THE US | CANADA |
| Subprime mortgage / 100% + loan to values | Well documented mortgages, generally not exceeding 70% loan to value |
| Securitization based on many tranches with now “suspect” bond ratings | Securitization that is simple, well documented, and based on due diligence |
| CDO’s and Synthetic CDO’s | Too “outside of the box” for us |
| 40:1 lending ratios at financial institutions and hedge funds | Is that a way to avoid tolls on Highway 401? |
| AIG swaps and credit derivative portfolios | Some Canadian financial institutions benefitted from buying protection from AIG |
| Madoff | Madoff “wannabes” |
| Massive bonus structures at banks and hedge funds | “We should be so lucky” |
| Total collapse of real estate values | A bit of a roller coaster ride. In most areas, an equilibrium has returned. But, in certain markets and geographical areas, there is some frothiness |
| Total collapse of lending market. Even after a stabilization, not much is going on due to defaults | Despite a much more restrictive lending market, business continues with minimal defaults |