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Investors have little to fear of a housing meltdown

by Ephraim Vecina on 05 Dec 2018

Would-be investors who remain wary of the Canadian real estate market’s price growth should take a measure of comfort in the results of a new study conducted by Chartered Professional Accountants of Canada (CPA Canada).

The research found that the market’s fundamentals have robustness as their main feature, precluding any U.S.-style meltdown in the near future.

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“Beyond prices and debt levels, Canada shares far fewer similarities with the U.S. than you might think. This becomes very apparent when you look at just one measure: credit quality,” CPA Canada chief economist Francis Fong stated.

Fong emphasized that seeing the U.S. crisis as a reference point for the possibility of a Canadian collapse would be futile due to the pre-eminence of different factors in the two markets.

Read more: Canadian retail will be a great investment destination in 2019

The sheer volume of subprime mortgages issued to borrowers with low credit quality, who cannot afford to repay debt, is frequently cited as one of the leading causes of the U.S. breakdown.

In comparison, Canada’s share of high-credit-quality clients increased from 66% in 2002 to 88% in 2017, according to the CMHC. During the same time frame, the proportion of low-credit-quality borrowers fell from 17% to just 3%.

“The situation in Canada is likely not a bubble in imminent danger of deflation; in fact, housing prices may reflect the true value of living space in Canada and in some markets increased household debt may be the new price for real estate,” Fong explained.

“Our cities frequently are listed among the best places to live and work in the world and, compared to their peer cities abroad, they are not among the most expensive. We may simply be dealing with the law of supply and demand, so affordability could continue to be a challenge for the foreseeable future,” he added.


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