Canada's Housing Bubble

Jan 28, 2010 Peter Dolezal Peninsula News Review

As Greater Victoria real estate prices recover to their record highs of 2007, questions are being raised as to whether we may be headed for a U.S. style “bubble-and-bust” in the housing market.

Not at all likely, is my conclusion. Yes, interest rates will rise. It’s just a matter of how soon. When they do, they will impact affordability for buyers, particularly the first-timers who are the primary engine for stimulating demand. Sales volumes will be reduced. With lower demand, prices will soften. But home values are unlikely to crash, as they did in the U.S.

A relatively normal cyclical correction is more likely for Canada. I remain bullish on the long-term stability of our real estate sector. Canadian home buyers generally, enjoy a much higher level of credit-worthiness than do our friends in the U.S.

One similarity between our two countries is that about 68 per cent of all residential property in each is occupied by homeowners — but there the similarities end.

Canada has about 9.15 million homeowners. Some 40 per cent of these have no mortgage on their property. Of the 60 per cent who do have a mortgage, they enjoy an average equity of 52 per cent of home value. Fewer than 3 per cent of mortgage holders are in the unfortunate situation wherein their home’s value is less than their mortgage indebtedness. The comparable “under water” proportion in the U.S. is about 30 per cent.

Homeowners who walk away from their home and mortgage in the U.S. are not subject to legal recourse. If a homeowner in Canada goes through a foreclosure, the lender is legally empowered to seek recovery of any loss remaining after the home is sold. This major difference ensures that Canadian homeowners do not flippantly walk out on their mortgage obligation, as has often occurred in the U.S., thereby adding fuel to its residential real estate meltdown.

Much as we might envy U.S. homeowners the tax-deductibility of their mortgage loan interest, its absence here has reduced the risk of Canadian homeowners entering into imprudently large mortgages. And, without the ability to tax deduct interest costs on mortgages, Canadians have a huge incentive to pay down their mortgages as quickly as possible.

Most important, we in Canada have always had tighter lending criteria for mortgages. As well, buyers with less than a 20 per cent down payment are required to purchase “high-ratio” mortgage insurance. This protects the Canadian lender from default.

These major differences between our two countries are why we avoided a U.S. style sub-prime-mortgage-induced home-value meltdown. It is also why we are unlikely to see it in the future.

Today, average U.S. home prices remain about 30 per cent below their previous peaks. Although Canada’s values dropped about 11 per cent on average, they have after little more than a year, fully recovered in most provinces. In the U.S. today, about one in every eight homeowners is either in arrears on his mortgage obligation, or worse, in foreclosure. In BC, the comparable default statistic stands at about one homeowner in 300.

We may occasionally have cause for complaint about lenders and federal or provincial policy-makers. In the area of public policy and lending practices associated with the housing and mortgage sectors however, we in Canada are to be envied.

We’ll continue to experience ups and downs in the housing market, but a crash? Not likely.

A semi-retired corporate executive living in Sidney, Peter Dolezal founded, a successful real estate company in Vancouver. His best-selling books,The Naked Homeowner and The Naked Traveller, are available at Tanner’s Books.