Hat tip to Rick for sending this along, from the WaPo:

TORONTO — When he bought a home last week with a 40 percent down payment, lawyer Kevin Fritz didn’t see the transaction as particularly relevant to the debate over global financial stability.

But consider: With U.S. home sales and prices still shaky, Fritz bought in a Canadian market that already has rebounded beyond pre-crisis levels. Without the key tax advantages available to U.S. home buyers, he amassed as much as possible for the down payment, and he expects to pay off his 15-year mortgage with the same bank that gave him the loan — a rarity in the United States, where finance companies typically resell mortgages.

“Canadians are debt-averse,” said Fritz, an attitude that’s part cultural and part shaped by banking practices and regulations designed to keep people out of homes unless they can clearly afford them. “People here don’t leverage.”

Canadian tax law is neutral: Interest on mortgage payments is not deductible, a fact that encourages home buyers to make larger down payments and avoid withdrawing equity. The banks themselves expect to hold on to the mortgages they make and collect the interest. Most loans allow interest rates to be reset after five years, and most also carry prepayment penalties — rare in the United States.

The result is a market that appeared sluggish when the U.S. property bubble was inflating but “has been rational” throughout, said Craig Alexander, TD Bank’s chief economist.

“Fundamentally, what we have seen is the Canadian housing market responding to the dynamics of supply and demand,” Alexander said. He contrasted that with a U.S. housing market driven by loose lending standards and by Wall Street demand for mortgages to be bundled and sold as securities: “The mortgages made in Canada are mortgages that banks are quite happy to keep on their balance sheets.”

Subprime mortgages in Canada accounted for only about 5 percent of the loans originated by local banks during the housing boom, compared with more than 20 percent in the United States.

And while U.S. housing has remained sluggish, the Canadian market is showing so much life that the Bank of Canada recently raised interest rates and regulators have taken other steps to temper demand — for example, tightening mortgage qualification rules.

Pamela Alexander, managing director in Canada for the Re/Max real estate firm, said her brokers complained when those actions were taken.

“I said: Be happy it is happening,” she said. “It will be short-term pain. But it means a long-term market.”

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