MORTGAGE SOLUTIONS

The housing bubble debate: Continued

Two think tanks came out with two conflicting reports about whether Canada is, indeed, on the brink of a housing market collapse. The C.D. Howe Institute believes we're in the clear, while the Canadian Centre for Policy Alternatives has a significantly less positive outlook. Below is a summary of their arguments:

C.D. Howe

- A U.S.-style housing bust - with its influx of foreclosures and collapse of housing prices - is unlikely in Canada due to our difference in mortgage policies.

- A decline in underwriting standards was largely to blame for the U.S. crash. While Canada offered similar "risky" products - by means of interest-only loans, 40-year amortizations and zero-down loans - between 2003 and 2008, these products were eliminated in 2008, and policies were furthere tightened in April of this year.

- Throughout it all, Canadian banks - unlike those in the U.S. - were required to purchase mortgage insurance on all loans. Those with less than 20% down payments had to meet even stricter criteria to ensure that applicants were within a certain debt load level and credit rating.

- The result of Canada's stricter policies is that there are significantly less high-risk mortgage loans in the market.

Canadian Centre for Policy Alternatives

- A housing bubble emerges when housing prices increase more rapidly than inflation, household incomes and economic growth. Low mortgage rates, easy access to credit, net immigration and stock of available housing contribute to this scenario.

- All six major cities in Canada - Vancouver, Calgary, Edmonton, Toronto, Ottawa and Montreal - are showing signs of a bubble. This is the first time all six have been in a bubble in the past 30 years.

- Historically, housing prices have been between three and four times provincial annual median income. Today they're costing between 4.7 and 11.3 times Canadians' average income.

- Rising interest rates will be the biggest driver behind a crash. If mortgage rate increases can be kept under a 1% average increase over the 24 month rolling average, we will see a soft decline rather than a drastic collapse.