Although, Canada was relatively unaffected after the market crash shook the world in 2008, its constant growth is finally catching up with it. Every 5 years Canada resets its existing mortgage rates to the current mortgage rate and roughly 47% of mortgages will reset in the next year. This will add strain to a country with one of the highest debts per household and could cause many homeowners to default on their mortgage.
Canadian law is designed to prevent this from happening since it requires mortgage insurance. At the same time, this may have lulled lenders into a false sense of security and caused them to lend when they shouldn’t have. The changing market makes many wonder whether the government will honor these policies.
- The Canadian market survived the global housing crisis relatively unscathed.
- Current market conditions will likely culminate in a crash and cause many homeowners to default on their mortgages.
- The Canadian government has required mortgage insurance to avoid this type of crash, but it’s possible that these policies won’t be honored.
Canada escaped the global financial crisis in 2008 unscathed relative to much of the developed world, but after 15 years of virtually uninterrupted home price appreciation, America’s neighbor to the north might be cooking up a financial crisis of its own.
Loose lending has helped create a housing bubble to rival that of the U.S. in 2006, and with household debt in Canada being among the highest in the world, Canadians have little room in their budgets to absorb rising housing costs.
The next year will be telling because unlike in the U.S., the interest rates on most mortgages in Canada reset to the current rate every five years, and 47 percent of Canadian mortgages will “reset” within the next year. While the Bank of Canada expects the reset rates to be on par with what they were five years ago, even a slight rise could put Canadians with a high amount of debt at risk of default.
“We’re basically in a correction now, which most people believe will be a soft landing,” said Hilliard MacBeth, author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash. “I’m pretty sure it’s not going to be a soft landing. It’s going to be a crash.”
Since the turn of the century, home prices in Canada have risen steadily, save for a slight downturn during the American housing bust. Low interest rates, strong immigration, and an influx of foreign money into the market have made Canada’s housing market lucrative, but over the last five years the boom has turned into a bubble.
One common measure of housing bubbles is the home price-to-rent ratio. If the home is worth more than what it can earn as a rental property, then the home is considered overvalued, and the price-to-rent ratio measures that. In the chart below, you can see that Canada not only has one of the highest price-to-rent ratios, but that the ratio is also well above what it was in the United States at the peak of its housing bubble.
View the original article at Curbed