What Risk of a Canadian Housing Crisis?”
Dueling reports from Canadian think tanks, including C. D. Howe and the Canadian Centre for Policy Alternatives, have recently been released on the prospect of a housing crisis in Canada. We have long been concerned about the avid mortgage lending by Canadian banks in H2 2009 and early 2010, which contributed to a housing-led domestic demand revival (see related Critical Issue). Ultra-low interest rates and diminishing lending standards contributed to a deterioration of household debt levels. While Canadian financial institutions did not import some of the worst lending practices of their southern counterparts, they still extended loans with abandon and household indebtedness rose; and the amount of collateral needed to receive a loan was reduced on the margin. We believe that the housing market faces a long period of cooling from 2007-08 and even 2009-early 2010 as housing unaffordability, lower wage gains, the end of tax incentives and lower household formation constrain purchases. We have already seen such slowing in the sales and starts data and we continue to expect declines in these areas.
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