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Tale of Two Countries: What U.S. Real Estate Leaders Can Learn from Canada’s Experience Before and After the Crisis

In the aftermath of the worst global financial crisis since the Great Depression, Canada is basking in a well-deserved time in the sun. Unlike the United States and other countries that bore the brunt of the economic collapse of 2008, which was directly linked to a boom and bust cycle in real estate, Canada avoided most if not all of the problems. The reasons can be summed up in two main factors: fiscal conservatism and strength in leadership.

In discussing Canada’s advantageous position pre- and post-crisis, real estate executives profiled in my latest book, Market Discipline: The Competitive Advantage, Lessons from Canada’s Real Estate Leaders, never took a “we told you so attitude” (which, in itself, is illustrative of the conservative Canadian character that tends to focus on the job to be done rather than bragging about it). Nonetheless, conversations with these executives revealed leadership lessons that might be viewed as truisms—except that consistency in execution and deep influence on corporate culture make them truly notable.

Leadership clearly has made a difference in Canadian real estate, in which there are fewer players compared to larger markets such as the U.S. Because the Canadian industry is more of an intimate community, a tremendous value is placed on integrity and fair dealing. Those who do not treat others well will not be accepted and, as a result, will not be successful.

Mistakes have been made over the years, to be sure, including back in the “cowboy days” of land speculation and development. By readily admitting those mistakes of the past, however, the Canadian industry has evolved with a mindset that emphasizes analysis, particularly around risk, and an attitude of investing as if one’s own money is involved (which oftentimes it is, right along with investor funds).

The most stunning differences between the U.S. and Canada emerged pre-crisis. While the U.S. went on a commercial mortgage-backed securities (CMBS) securitization binge—creating demand for more leverage, which resulted in too much lending to under-qualified borrowers—Canada followed a far more conservative course. For example, Canada had a lower rate of loan originations by mortgage brokers, less mortgage securitization, and a smaller subprime mortgage market. In addition, banks in Canada retain on their own balance sheets and service nearly 70 percent of the mortgages they originate, which encourages prudent lending practices.

Other significant differences include full recourse loans in Canada, obliging the borrower to remain fully responsible for the mortgage even in the case of foreclosure; shorter-term fixed rates of a maximum of five years; widespread use of mortgage insurance, amounting to about half of mortgages (versus about 30 percent in the U.S. now and 15 percent pre-crisis); no tax deductibility for mortgage interest, which has not hurt home ownership which is higher in Canada than in the U.S. (68 percent versus 65.4 percent, respectively); and higher prepayment penalties, which discouraged the kind of refinancing that occurred frequently in the U.S. pre-crisis.

Taken together, the features and regulations in the Canadian banking sector resulted in a healthier and sound pro-lender environment in Canada pre-crisis, whereas the U.S. banking system encouraged excessive lending to risky borrowers.

At the same time, this same conservatism can be found in the mindset of many Canadian real estate leaders, particularly with regard to risk. Canadian real estate firms understand that reasonable leverage is necessary to drive growth, and also appreciate that a viable operating platform and philosophy are fundamental to success. Risks tend to be evaluated realistically with an eye toward identifying what could go wrong, while not putting on the brakes excessively and thus preventing a solid return from taking an appropriate risk.

Although evaluating risk and reward is part of risk management 101, my analysis of what went wrong in the U.S. real estate sector (as I wrote in my previous book, Keepers of the Castle) uncovered how fundamental leadership and management tenets were consistently violated. In the U.S., unfettered risk kept the “bubble inflated,” which led to widespread risk imbalance. People were paid to generate volume, not to underwrite risk. Employees were encouraged to compete, not collaborate, and there was a focus more on individual objectives rather than company performance. Another risky practice was hiring “rock star” performers, instead of putting precedence on the company and client needs.

Other leadership mistakes made in the U.S. real estate industry pre-crisis were: letting one’s ego get in the way, with some leaders sporting high-profile public personae that proved distracting and counterproductive; pretending to have all the answers, resulting in know-it-all CEOs who drove organizational opposition underground; avoiding change, which allowed deadly complacency to take root; allowing lax management to become a business strategy, instead of pursuing one’s entrepreneurial instincts, buffering up the strengths of one’s management team, and re-underwriting one’s well-conceived strategy; and avoiding responsibility for mistakes, which undermines accountability and a strong value system.

The mistakes that were made in the U.S. serve to accentuate the competencies found among Canada’s real estate leaders, who with fiscal conservatism, disciplined risk management, and solid leadership principles have been able to grow their business—and even to expand beyond their borders, including in the U.S. Entrepreneurs by spirit, Canadian leaders are always in growth mode, but with a strong understanding of their sources of capital and the associated costs and risks.

Thus, Canadian real estate executives have distinguished themselves not only by what they’ve done, but also by how they’ve done it—demonstrating a commitment to leadership values and integrity, and with a close watch kept on risk at all times.

William J. Ferguson, chairman and CEO of Ferguson Partners Ltd., and co-chairman and co-CEO of FPL Advisory Group, is the author of Market Discipline: The Competitive Advantage, Lessons from Canada’s Real Estate Leaders (2012), and Keepers of the Castle: Real Estate Executives on Leadership and Management (2009).

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