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The long shadow over Canada's housing market (Alexei Vella/Alexei Vella for The Globe and Mail)
The long shadow over Canada's housing market (Alexei Vella/Alexei Vella for The Globe and Mail)

The long shadow over Canada's housing market Add to ...

Wake up, Canada: The house party is over.

A wide range of indicators say Canada can no longer count on a booming housing market to keep the economic blues at bay. But in the quarters where it most needs to be heard, the message is not resonating.

Many policy makers have yet to adjust their view of a market that just last spring was helping the economy rebound from the recession. Sales of existing homes were setting records month after month; a generous tax credit had encouraged the masses to take on renovation projects; new home starts were hitting all-time highs.

Victor Fiume, president of the Canadian Home Builders' Association, remembers speaking at a meeting of municipal leaders at the height of the boom. "They were bouncing down the stairs with excitement about what it meant to their tax base."

Many of them are still holding on to those hopes, even as the market slows.

"Now they're looking at me like I have two heads," Mr. Fiume, who is also general manager of Durham Custom Homes in Oshawa, Ont., says of the local politicians. "They find it very difficult to believe we can come to such an abrupt halt."

The trouble is not that Canada is on the brink of a gruesome real estate bust like the U.S. - because it isn't. It has been shielded by more cautious lending practices, and avoided such bad practices as zero-down-payment or no-documentation mortgages. With few exceptions, Canadians have equity in their homes.

Mortgage defaults are minimal. Housing speculation never reached the absurd levels that it did in such Sun Belt states as Nevada and Arizona, and the federal government has taken steps to ensure that it never does, in part by requiring much higher down payments for investment properties. There is a lot that is good about the structure of the Canadian property market.

But a period of stagnation or slowly falling prices, coupled with weak home sales and waning construction activity, would cut off one of the engines that drove impressive economic growth and job creation in the years before the 2008 financial crisis.

This week, when the Bank of Canada released its latest report on the domestic economy, it specifically mentioned the prospect of "a more pronounced correction in the Canadian housing market" as one of three key risks.

The primary reason for that, of course, is the mountain of debt carried by many Canadian households, which has worried the central bank governor for many months. Toronto-Dominion Bank said this week that Canadians will soon owe more than $1.50 for every dollar of disposable income, an unprecedented level. And home prices are already stretched far beyond their historical norms, particularly in the largest urban markets such as Vancouver.

It all adds up to a simple, unpleasant equation: High debts, plus high home prices, plus high unemployment, plus slow growth in incomes, equals a housing market that's much different than the one Canadians are used to. Is it any wonder that, after 10 years of explosive growth, the housing market appears out of gas? Sales fell by as much as 45 per cent in the country's largest cities over the summer and haven't recovered through the traditionally brisk fall market.

That means the summer effectively wiped out a year's worth of gains, with the average resale price back at year-ago levels. New construction fared little better, with the seasonally adjusted rate of starts falling to 186,000 in September from April's peak of 201,900.

That has dramatic implications for employment and consumer spending levels - and for an economy that has grown accustomed to relying on housing-related spending for about 20 per cent of its gross domestic product.

"Canada doesn't need a U.S.-style problem to have a problem," said Alexandre Pestov, a market analyst at Three Bears Research in Toronto. "A Canadian-style issue will do just fine."

The threat to come

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