Canadian housing market: Sound or a bubble set to burst?

CMHC buildingCTV reports the debate in Canadian housing circles about the soundness of the housing market. Is there a U.S. style housing bubble?  The signals are mixed, according to experts. Prices in Vancouver look dangerously high, while towns such as Saint John, New Brunswick are quite affordable. Compared to renting, owning a home is now more expensive than it has been in decades. Home prices are rising faster than incomes. Higher home prices has lead to more borrowing. Three years ago, just 1 in 9 mortgage-holders borrowed more than 80% of the value of their homes.  It’s 1 in 6 today. Canada Mortgage and Housing Corporation (CMHC) stepped in when investors became reluctant to lend to banks during the Black Autumn of 2008. CMHC bought tens of billions of dollars worth of mortgages from financial institutions. That move supported the Canadian housing market. Finance Minister Jim Flaherty then reigned in 40 and 35 year mortgages, while tightening financing rules. CMHC guarantees and lending changes moved the home ownership rate from just above 60% to now about 70%. This compares to about a 50% rate of home ownership in Germany or Switzerland and the U.S. rate now at 66% and dropping, down from the previous 69% ownership rate. In just six years, CMHC insurance business has doubled, to more than $500 billion worth of mortgages. About $45 billion is with the riskiest group—buyers with less than 10% equity. If there is a Canadian housing bubble, the government backed CMHC – meaning Canadian taxpayers – are left holding the bag. Thus the debate in the great white north about how to support housing while avoiding the meltdown that has occurred in the U.S..

(Photo credit: Boomerang Financial)

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