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What does a healthy housing market look like? It’s a place where homes are readily available to buy or rent at a reasonable price. There’s no scarcity, since rules permit density across all neighbourhoods. Prices tick up modestly each year, alongside inflation and economic growth. Homes house people. Abundance means housing isn’t a speculative financial asset.

That’s the ideal. It doesn’t look much like Canada’s reality. Decades of restrictions against building, as the population grew, fed a mounting scarcity. Then came years of ultralow interest rates. A surge of demand arrived with the pandemic. It all unleashed a mania. National prices rose a boggling 53 per cent in two years, according to Thursday’s Bank of Canada financial system review.

The report enumerates current economic dangers. The hefty debt Canadians carry ranks No. 1. The second top risk is “elevated house prices.” None of this is new; back in 2014 the bank put Canadians’ debt as the top worry and housing “imbalances” in second. It’s been a one-two punch ever since.

What’s changed is that things have gone from bad to worse; from perilous to vertiginous. Fifteen months ago, this page called the housing market “bonkers.” Experts urged interventions to break the fever, but unlike the last mini-mania, in 2016-17, policy makers pretty much did nothing while the Bank of Canada, understandably concerned about the pandemic-beset economy, made sure money stayed cheap. The house party kept on partying. It was a rager, and no one called the cops.

And now, it’s the morning after. The Bank of Canada is understandably worried about “elevated” home prices, and the big mortgage loans that elevated them. With the bank rapidly raising its policy interest rate to corral inflation, the potential pain for indebted buyers is a growing risk to the financial system.

The good news is many of your neighbours are insulated against price fluctuations: 28 per cent of households own their home outright. Another 37 per cent are renters. The most exposed are the 35 per cent of households that own a home with a mortgage.

One particularly worrisome chart in the bank’s financial review looks at risky mortgages. These are owners who have at least 20 per cent down, so they are uninsured, but their loan-to-income ratio is more than 4.5 times. In the last mini-mania, the level of overstretched mortgages peaked at 19.8 per cent. Today, it’s 26.7 per cent.

Warning: Canadians are house-rich – but heavily in debt

Canada: The land where any plan to build more housing risks being studied to death

Another danger sign is the increasing role of investors in the housing market. In late 2019, they accounted for 19 per cent of mortgages. The latest figure is 22 per cent. And a lot of these investors borrowed against their homes – you know, those whose value shot up 53 per cent in two years – to buy second and third properties. The Bank of Canada, in its dry verbiage, says that “investors can amplify house price cycles.” That means on the way up – and on the way down. A homeowner, who lives in their home and faces a loss on paper but can pay the mortgage, is probably okay. An investor with diminishing equity in their first home and rising mortgage payments on the second is another story.

Some kind of reckoning is likely, if inflation shoots higher (the May figure arrives June 22) and the central bank aggressively ratchets up its policy rate. Even for people who aren’t caught in an immediate bind, future mortgages could be a lot more expensive. The bank outlined scenarios for mortgage renewals in 2025-26 at a median of $420 more per month – 30 per cent higher than payments in the good days of 2020-21.

And for all that, lower housing prices won’t suddenly make homes affordable. Prices had been stretched before the pandemic, and the last two years were extreme. Coming down from such highs won’t be easy; one Bank of Canada forecast suggested struggles with debt and housing could significantly cut economic growth.

The central bank believes that the financial system can weather a housing storm, as it weathered the pandemic. But these ups and downs are brutal for the average person. This is not how a housing market is supposed to work.

Canadians have been living through an intense conflagration, years in the making.

There were cries of warning about this unbridled market, but people were getting rich.

The danger now is that so much of the wealth was only on paper.

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