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The Bank of Canada is considering raising interest rates in response to the problem, which experts fear could lead to the collapse of Canada’s rising property market. But optimists argue that the market is generally healthy, so there is no need to worry too much.
There is a strange kind of lending that is often associated with the reckless and impulsive housing market that enveloped the United States around 2005. It only needs a 5% cash down payment and 3% can get it back. It can be even crazier. There is no need for a down payment at all. So when these products, and similar products, began to emerge in the normally cautious Canadian financial sector, it alarmed Ottawa policy makers.
This year is the 25th year of the Canadian housing bull market, which is an almost uninterrupted straight rise, and there is almost no similar situation in the world. Even as global real estate prices soar, New Zealand is the only major economy with a more prosperous housing market than Canada, according to Bloomberg Economics. After years of rising prices, including a 21% surge since the start of the epidemic, millions of middle-class Canadians have had no chance to scrape together the traditional, 20% down payment.
In Whitby, a thriving Toronto suburb nestled on the shores of Lake Ontario, this is the lament Sheri Corbett, a mortgage broker, keeps hearing from first-time buyers. More than half of them chose to allow them to borrow money to make a down payment, or to offer a loan that would be repaid in cash after the transaction.
A year ago, such products accounted for only a small part of her business.
Asked if this worried her, Corbett, who works with some of Canada’s biggest banks, came up with a statistic she was proud of. In her 13 years in the industry, not a single client defaulted on her debt: “it’s impossible here, and we’ll never see what happens in the United States.”
Perhaps because Canada’s property market has long ignored gravity, most pessimists and forecasters have fallen silent after years of mistakenly warning of an impending collapse. In fact, in some circles, the opposite concern has begun to emerge: House prices will inexorably rise year after year, deepening inequality and sucking up more and more capital and labor. these resources could have been used more effectively in other sectors of the economy.
However, the riskier lending boom has begun to weaken the most critical of the three pillars, which industry insiders have repeatedly mentioned as a solid foundation for house prices: traditional, conservative lending practices. Rising demand and tight supply are the other two pillars.
Canada may still have a series of regulations to prevent the most dangerous applicants from getting mortgages, the kind of people who belonged to the US subprime category in the 1980s, but today many people who get loans are taking on debt burdens that were once unthinkable.
Tiff Macklem, the governor of the Bank of Canada, and his staff have begun to express concern publicly. In its annual review of the financial system, released in May, policymakers showed the risks posed by the deterioration in the quality of home loans.