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March 26, 2010

Canadian banks

U.S. banks suffered greatly during the recession, so much so that major intervention by the federal government kept many of them afloat. But the same problems didn't occur for Canadian Banks. Why?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The simple answer is that there wasn't the same kind of real estate boom in Canada that we've had in the U.S. And of course, what happened in the U.S. was we had this big real-estate boom that fueled speculation in the real-estate market. That motivated banks to make a lot of loans in the real-estate market.

"Without that boom, you didn't have Canadian banks making those kinds of loans. They were much more diligent in making sure the loans they did make were good loans.

"So one big question is, Why didn't we have the real-estate boom in Canada? And I think one reason goes back to how Canada taxes real estate. In the U.S., real estate is very favored. We get to deduct our mortgage interest. Also when we sell our homes any capital gains are not taxed.

"You don't have that in Canada. There is no deduction for mortgage interest, and capital gains are taxed when the home is sold.

"So as a result Canadian banks -- they do obviously make real-estate loans, but they didn't get into that go-go mentality that making real-estate loans was just going to lead to everyone getting rich."

Posted by deeshore at March 26, 2010 09:09 AM