Rising household debt, home values won’t cause market to collapse

Canada’s housing market is unlikely to end up in a bubble and a subsequent crash despite higher household debt and home prices in select markets, according to new research conducted by Chartered Professional Accountants of Canada (CPA Canada).

While the United States had to grapple with the aforementioned situations in 2008-2009, CPA Canada said that Canada is far from experiencing the same struggles given that it is more resilient than it might first appear. On top of this, the country shares fewer similarities with the US than one might think.

For instance, the key factors in the US collapse were lax regulation and the prevalence of sub-prime mortgages issued to homebuyers with low credit quality who couldn't afford to keep up payments.

Contrastingly, the Canadian Mortgage and Housing Corporation, which insures Canadian mortgages in cases where buyers cannot make a 20% down payment, reported that the number of borrowers with high credit quality has increased from 66% in 2002 to 88% in 2017. Meanwhile, the number of low-credit-quality buyers slid from 17% to 3% over that period.

The study found that Canada's housing market is not immune to risks, but its potential problems moving forward will not be identical to the US crash.

The newly introduced rules that more securely protect mortgage lenders from defaults, as well as the tighter income-testing standards for borrowers, contributes to the strengthening of the Canadian system. Hence, the country will likely be ready for prospective challenges should the economy soften here or abroad.

"The situation in Canada is likely not a bubble in imminent danger of deflation; in fact, housing prices may reflect the true value of living space in Canada and in some markets increased household debt may be the new price for real estate,” said Francis Fong, CPA Canada chief economist. “Our cities frequently are listed among the best places to live and work in the world and, compared to their peer cities abroad, they are not among the most expensive. We may simply be dealing with the law of supply and demand, so affordability could continue to be a challenge for the foreseeable future."

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