Canadian Housing Market: Burst of Housing Bubble Could Be Damaging for Country’s Banks

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Canadian Housing Market: Burst of Housing Bubble Could Be Damaging for Country’s BanksAlthough, leading Canadian financial institutions were relatively unaffected by the global financial recession of the late 2000s, that might not be the case now, as a leading market analysis agency believes that the so-called housing “bubble” in Canada might be ready to burst that may be spurred on by an increase in hitherto rock-bottom interest rates.

Data from Morningstar suggests that investors in Canadian financial institutions should brace themselves for a possible housing market crash driven by increasing interest rates, which would in turn make home ownership less affordable and potentially make it more likely for consumers to default on their home loans. And as Canadian banks provide up to 75 percent of residential mortgage credit, this could pose a deleterious effect on these institutions’ profitability.

Morningstar analyst Daniel Werner, who had previously cautioned against similar risks, said that it may all depend on how affordable homes would be when interest rates make their inevitable rise. He believes that the Canadian housing bubble may burst within the coming five years, and a correction to home values may be something that may be hard to avoid.

In all, Morningstar forecasted that home prices may drop by about 25 to 30 percent from their peak level. However, Werner pointed out that “a combination of factors,” and not one primary variable alone, may drive such a crash.

The Chicago-based Morningstar’s analytics sought to counterbalance the bullish postulates made by market optimists who believe that Canada’s housing market is too balanced to be at a risk of a U.S.-style housing crash, and that any increase in rates may only result in a soft landing. In conclusion, the agency concluded that “History has shown, time and again, that ‘this time’ is not different,” in response to optimists who believe that comparing Canadian and U.S. housing markets is akin to an apples-and-oranges situation.