It says that “unsustainable home prices and record high household leverage” make Toronto and Vancouver’s housing markets increasingly vulnerable to a “steep price correction.”
On a positive note, Fitch says that there will is not the risk to the financial system that was seen during the US housing crisis, due to the stability of Canada’s financial structure.
"Canadian banks are subject to rigorous oversight and regulations requiring prudent mortgage lending and underwriting standards," said Fitch Director Kate Lin. "What's more, credit quality for Canadian mortgage loans remains strong unlike the drift towards weak borrower and loan quality that we saw a decade ago in the U.S."
Non-prime mortgage lending in Canada is around 10 per cent of the market share, Lin added, compared to 50 per cent in the US at the peak of the crisis and the Canadian government has been taking steps to mitigate the risk in the housing market.
Canada is unlikely to mirror the declines and fallout experienced during the U.S. housing crisis due to major differences in the housing and mortgage finance systems," Lin said.
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Fitch Ratings has issued another warning of vulnerability in the two hottest Canadian housing markets.