Three Crucial Points to Understanding the Potential Canadian Housing Bubble

While political campaigns and national tragedies have dominated this week’s 24-hour news cycle, a story is brewing which may spell trouble for the already-ailing Canadian economy.

According to Moody’s Investor Service, Canada’s current housing situation is beginning to resemble that of the United States prior to the housing bubble burst in 2008.

Moody’s noted that the country’s mortgage debt has more than doubled over the past decade; meanwhile, the index of housing costs to disposable income has risen 25%. In other words, Canada risks overvaluation and borrowers whose housing payments may potentially go understand.

That being said, it’s not all gloom and doom for the Canadian banks, who would be reportedly better-equipped to handle such a crisis versus the United States in 2008.

Housing bubbles can be a bit confusing; however, there are three key points to keep in mind as this story continues to develop.

Some Hot, Some Cold

Canada is facing a phenomenon as the housing markets of some cities and provinces are red hot; meanwhile, others are taking a nose-dive.

House prices in Toronto and Vancouver continue to soar; however, areas such as Quebec, Halifax, Calgary and Edmonton are seeing housing prices sink. As per, it’s still possible to find an affordable apartment in Toronto, which may be a more attractive option for home-buyers as the average price of a Canadian home has risen to over $550,000.

Although experts aren’t panicking just yet, the state of the market is sends a strong signal to potential home-buyers and bank-owners alike: that is, proceed with caution.

Billions (Not Trillions) at Stake

Moody’s simulated an economic situation where housing prices would drop 25%, resulting in $18 billion dollars in total system losses, most of which would come from lending banks.

However, such a number would be a far cry from the trillions of dollars lost during the United States housing crisis of 2008. Moody’s also noted that the aforementioned Canandian banks would probably be able to recover from such losses in a matter of months.

The question remains: how are Canadian economists remaining so positive in the face of a potential bubble?

Lessons from the Neighbors

Much of their confident may very well come from the fact that they’ve done their homework regarding the United State’s housing crisis eight years ago. Moody’s stated that the harm done to Canadian banks would likely never reach the levels of the United States’ bubble.

Policy changes which differ from the United States and Canada, such as lower rates of sub-prime lending, help keep the Canadian housing economy in check. Unfortunately, small lenders are still under looser regulations and bad loans could worsen the potential crisis.

Despite this, the country is confident that they would be able to handle the shock of a housing bubble.

We’ll have to play the game of “wait and see” to understand how this crisis impacts Canada over the course of the coming months. Thankfully, the country seems to have learned from the follies of their neighbors eight years ago and therefore avoid the risk of a major economic catastrophe.

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