Article from CBC News: Aug. 31, 2010.

“As Canada’s record housing costs continue to slide, an Ottawa-based organization is suggesting parts of the nation are in a housing bubble, which may soon burst. Prices in six of the country’s largest housing markets have hit 30-year highs and are in bubble territory. A report by the Canadian Centre for Policy Alternatives coming out Tuesday also says a U.S. style correction cannot be ruled out. The Ottawa-based think-tank says home prices are 4.7 to 11.3 times Canadians’ annual income — much higher than historical comfort levels. Sales are down 25 per cent since reaching a peak at the start of the year, but in major cities, home prices were up 13.6 per cent in June from a year ago. The centre warns that a rise of one per cent to 1.25 per cent in mortgage rates would be enough to cause a housing crash similar to the one in the U.S. The report says bubbles occur when housing prices increase more rapidly than inflation, household incomes and economic growth.”

What Caused the American Sub-prime Crisis:
Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption. The USA home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004. Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher.

Approximately 80% of U.S. mortgages issued to subprime borrowers were adjustable mortgage rates.  After U.S. house prices peaked in mid-2006 and began their steep decline thereafter, refinancing became more difficult and adjustable-rate mortgages began to reset at higher rates leading to soaring mortgage delinquencies. The result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world.

Can We Expect to See a Crash Like this in Canada:
We must remember that Canada has a very different centralized federal banking system that has provided us with a few advantages when facing an international economic crisis:

  1. More fiscal regulation.
  2. Stricter lending practices than in the US.
  3. Stable interest rates.
  4. More conservative economy and higher employment rates.

While I don’t neccessarily believe that ” a rise of one per cent to 1.25 per cent in mortgage rates would be enough to cause a housing crash similar to the one in the U.S” we should contiune to see the American housing crisis as a cautionary tale of  loose lending standards and unchecked real estate values. Because these factors were not as prevalent in Canada, there are a lot less borrowers in Canada who are stuck with unaffordable mortgages. That said, not all lenders have been as responsible and if unemployment goes up and/or interest rates go up, we could see some evidence of sub-prime mortgage troubles here in Canada but not to the extent of what happened to our Southerly neighbors.

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