The real story behind housing and household debt in Canada

Is Canada heading for a housing crash? Record-high household debt and ever-rising home prices point in that direction. This report looks at the real story behind the headlines. What we found might surprise you.

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News headlines often point to a looming housing crash in Canada — a believable story given the U.S. financial crisis fresh in our memory, the ballooning house prices in some of Canada’s largest cities and record high household debt levels among Canadians.

The real story behind the headlines shows that the issue is more complex than statistics might show. Household debt and elevated home prices are not enough on their own to generate an economic crisis. In fact, a U.S.-style housing crash is highly unlikely in Canada for several reasons:

  • a high level of credit quality – contrary to the subprime mortgage experience in the U.S.
  • a concentration of mortgage activity among a relatively small pool of lenders
  • the way in which that smaller pool of lenders utilizes mortgage securitization

We must be clear that Canada is not without its own unique risks. There remains the ever-present risk of a hidden credit quality problem, made possible by the rise of lesser regulated non-bank mortgage lenders and mortgage aggregators.

However, the largest risk to Canada’s housing market remains the possibility of a cyclical downturn caused by rising interest rates or a potential shock to unemployment. When looking at the 2008-09 financial crisis in the U.S., Canada has very few of the ingredients that would turn a cyclical downturn in housing into a full-blown crisis, suggesting that a lack of affordability may be a permanent fixture in Canada’s largest urban centres.