I’ve begun to see a hint of fear in my potential home buyers eyes. It’s perfectly valid for home buyers and owners a like to have concern that Canada’s Real Estate ‘Bubble’ might pop and cause house prices and values to collapse just as we witnessed some years ago in the US. However, I can confidently say that though minor price corrections are not unlikely… a collapse is just not in the cards. But to understand why Canada will never see such a housing crisis, we must first understand why the US did and how we differ.
Canada’s housing market has little speculation…
Over the past decade, in Canada, the household starts only exceeded household formation by 10%! The majority of this gap found in our major cities, Toronto and Vancouver. However, major cities grow at a quicker pace than our rural communities and having our excess in these markets is not a negative! Now comparing this to the US, in the 10 years leading up to the crash, the gap between household starts and household formation was a whopping 80%. So in Canada, our supply of housing is a much better reflection of our actual demand!
Canadian borrowers are less sensitive to increases in interest rates…
Thanks to our great banking systems, Canada is seeing a substantial decrease in share of variable rate mortgages (mortgages with no fixed rate). While south of the border, borrowers were eating up variable mortgages while trying to take advantage of lower rates today and hoping for the best with rates tomorrow. Banks in the US created attractively wrapped variable mortgages to secure business in the short term that appealed mostly to those with marginal credit. But when year 3 rolled around, the interest rates jumped and owners were seeing zero appreciation in their homes. Thousands of home owners simply walked away from their houses, leaving the banks to liquidate in a market with no buyers.
Lucky for us Canadians, with so few people opting for the variable rate mortgage, rising interest rates will not be accompanied by an increase in mortgage payments for the majority of us which lowers our overall risk of experiencing default.
Canadian regulations will ultimately save the day!
Canadian regulatory bodies like CMHC (Canada Mortgage and Housing Corporation) and the Federal Government that regulate our banking systems, have done a great job at ensuring a bright and secure financial future for all of us. We are quite lucky to have in place the systems and policies we have. In fact, Canada is widely considered to have the most efficient and safest banking system in the world, and has been ranked the world’s soundest system for the past three years according to the World Economic Forum. While we have our big 5 banks to choose from, the US had thousands of banking options and with more options comes a more competitive nature. US Federal Regulatory agencies permitted financial suicide in the form of zero down and zero interest options. The US Treasury encouraged people to take on debt that they both knew they could not afford and when people began to walk away from their debts, the banks who now owned these debts began to crumble. While CMHC may have tightened up on mortgage lending rules earlier this year causing a bit of a decline in sales activity, they do these things with Canada’s best interest at heart and we should be thankful for the financial security we have here.
Finally, to go a bit further and to illustrate why Canada is NOT headed for a market collapse, here is an extremely useful info-graphic from YourMoney.ca.