Canadians are becoming increasingly concerned that, like our neighbours to the south, there may be a housing bubble in Canada.
While the prospect of a bubble has been downplayed by the Bank of Canada, a number of economists have warned that Canada’s housing market is overvalued, which is bankers’ conservative way of suggesting a housing bubble may be afoot.
The CIBC warns a housing correction is in the cards, which is a milder alternative to a full- blown bubble bursting — though there are signs of trouble on the horizon. For instance, the OECD finds Canada has the highest consumer debt to financial asset ratio among 10 OECD countries, including the U.S. The Canadian Association of Accredited Mortgage Professionals estimate about 375,000 mortgage holders in Canada are already challenged by their current payments and may not be able to handle higher rates.
Read the CPPA report titled, Canada’s Housing Bubble – An Accident Waiting to Happen here.
Hot on the heels of CPPA’s report, the C.D. Howe Institute releases its own analysis of Canadian housing market and concludes that there is “little likelihood” of a US style housing crash occurring in Canada.
To evaluate the likelihood of a US-style housing market crash in Canada, one first needs to understand what caused the US housing boom and bust. As argued elsewhere, the Canada-US comparison suggests that a decline in underwriting standards played an essential role in the US housing market boom and dramatic bust. While monetary policy was very similar in both countries from 2000 to 2008, housing markets (especially the subprime component) were structured and regulated somewhat differently in each. Unlike in the US, the Canadian subprime market never expanded significantly into newer products, such as interest-only or negative-amortization mortgages, whose popularity grew rapidly in the US from 2003 to 2006. Moreover, while subprime lending increased rapidly in both countries over 2000 to 2006, the Canadian subprime market remains much smaller than that in the US, as subprime lenders accounted for roughly 5 percent of mortgage originations in 2006 – compared to 22 percent in the US (Mortgage Architects 2007).
Mortgage delinquencies support the key role of underwriting standards in what transpired. While mortgage delinquencies began to climb before the recession in the US, they only began to rise in Canada after the economic slowdown began. Moreover, the decline in Canadian house prices between August 2008 and April 2009 did not result in a large increase in mortgage delinquencies.
Read the C.D. Howe Institute's report, Not Here? Housing Market Policy and the Risk of a Housing Bust here.
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