Institute report refutes (Canadian) housing bubble trouble

Article from the Calgary Sun By MYKE THOMAS, SUNMEDIA - Last Updated: September 12, 2010 12:49pm

A new report from the C.D. Howe Institute refutes the notion Canada is on the verge of a housing bubble.

Many of the concerns about the Canadian housing market are motivated by U.S experiences, says the report’s author, Jim MacGee an associate professor of economics at the University of Western Ontario.

“To evaluate the likelihood of a U.S.-style housing market crash in Canada, one first needs to understand what (happened in) the U.S,” says MacGee. “The Canada-U.S. comparison suggests that a decline in underwriting standards played an essential role in the U.S. housing market boom and dramatic bust.”

From 2000 to 2008, monetary policies in each country were similar, however, housing markets (especially the subprime component) were structured and regulated differently in each, says MacGee.

“Unlike in the U.S., the Canadian subprime market never expanded significantly into newer products, such as interest-only or negative-amortization mortgages, whose popularity grew rapidly in the U.S. from 2003 to 2006,”

he says. “Tighter underwriting standards were a main factor that has protected the Canadian housing market, compared with the United States, which saw high-risk mortgages eventually lead to a rapid increase in foreclosures.

“This difference in government policy has helped to discourage the build-up in Canada of a large number of high-risk mortgage loans (and) policymakers would be well-served to remember these lessons should pressures to relax underwriting standards reoccur in the future.”

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