This question is a troublesome one, because behind it is a fear that a made-in-Canada real estate bubble might exist and that house prices and values could collapse as they have in the United States. To understand why the US real estate collapse cannot, and will not, happen in Canada, we need to visit the causes of the US collapse.
Firstly, the Canadian regulatory regime has consistently resisted the zero down, zero interest, mentality that the US federal regulatory agencies permitted, indeed encouraged, during the early part of the last decade. The US Treasury actually encouraged people to take on debt they couldn’t afford.
Secondly, Canada does not have an investment banking industry whose principal source of revenue was, or is, tranches of bonds secured directly by subprime mortgages or their derivative collateralized debt obligations (also ultimately secured by subprime mortgages). These huge banks, whose only motivation was to trade in these questionable bonds for profit, pushed the bonds rating agencies to classify poor bonds as better ones, thereby misleading the investor community.
Thirdly, The investors who bought up the real estate secured bonds in the US were hoodwinked into believing that the bonds were triple A rated, very secure and much like US treasury notes. However, the two principal rating agencies, Moodys, and Standard & Poor’s, failed in their responsibilities to properly scrutinize what was actually in the real estate bonds and thereby misled the investment community which assumed a safe haven in these so-called triple A bonds.
Fourthly, the mortgage industry in the US fostered a scheme of low interest “Teaser” rates for the first two years of a mortgage with a sharp increase in the third year. This scheme was particularly focussed on people with marginal credit ratings. When the third year rolled around, and where houses hadn’t appreciated in the meantime, the home owners simply walked away from their homes ……. by the thousands!
In a nutshell:
Canada has a tighter, and more effective regulatory environment
In all cases where the home owner has less than 25% equity in his or her home, the mortgage must be insured (e.g. through Central Mortgage and Housing Corporation or equivalent)
The home Buyer in Canada must demonstrate that he has the resources to withstand market fluctuations affecting the resale value of his home.
The Lending industry in Canada continues to take a responsible position in advising the potential mortgagor of what he can expect from the various funding options he might wish to consider.