Canada housing susceptible to U.S. - style bust

The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets such as Vancouver and Calgary, according to Robert Shiller, the University of Yale professor who predicted both the U.S. housing slump and the 1990s stock market boom and bust.

However, local experts say Vancouver's market fundamentals are very different from those south of the border, and that the biggest driver of the U.S. collapse -- subprime mortgages -- doesn't exist here.

Shiller, co-founder of the S&P Case/Shiller Home Price Index, said psychology is the primary driver of bubbles, and it appears that Canada has been caught up with home-buying fever just like the United States and other countries around the world.

Asked whether that meant Canada could face a similar bust, Shiller said: "Yes, especially in places that went up a lot like Vancouver and Calgary. I don't think Toronto has been quite as extreme."

Shiller said there was a natural connection between the United States and Canada.

"I would be surprised that the bubble that appeared in the United States and elsewhere didn't appear in Canada," he said in an interview with the Financial Post. "It's psychology, I think, that drives it."

But observers in Vancouver note that while the market cycle here has shifted to slower sales and the easing of prices, it hasn't been accompanied by the same financial calamity around mortgages that U.S. markets have experienced.

"Our economic fundamentals are different," said Stanley Hamilton, a professor at the Sauder School of Business at the University of B.C. "Whether [Canada's market] psychology will be the same is a little more difficult to say. You don't know what cranks people in times of stress, and we're all facing times of stress."

Hamilton added that in the U.S. it was subprime mortgages, which he characterized as "garbage-can" mortgages, that drove the problem and created a lot of the bad news about massive mortgage default and foreclosure rates.

Hamilton said that while Canadian mortgage-lending criteria did loosen a bit during the housing market's run-up, it was nothing like what happened in the U.S. where thousands of people were granted mortgages with no down payments and teaser interest rates that buyers would have no chance of repaying once set to market interest rates.

Where Canadian institutions offered high-debt-ratio mortgages, those mortgages are insured by Canada Mortgage and Housing Corp.

"I don't think [Canadian lenders] came within a country mile of what [American lenders] did," Hamilton said.

For that reason, Hamilton said Canada isn't seeing big increases in the number of people defaulting on mortgages.

Cameron Muir, chief economist for the B.C. Real Estate Association, added that the number of British Columbians in arrears on their mortgages -- those who have missed three payments or more -- is the lowest it has been 10 years, and the lowest in Canada.

Muir said rapid descents in real estate values in British Columbia "tend to come on the heels of a very poor financial outlook for households." And while B.C. households might be less confident than they've been in the past, and some elements of the economy have weakened, unemployment remains low and homeowners aren't under the stress that would force large numbers of them to bail out of their homes.

Shiller, whose book Irrational Exuberance came out in March 2000 just as the tech bubble peaked, said it was essential for the U.S. government to pass a financial bailout, although he believes the United States is facing a "severe recession," regardless.

"I'm concerned problems are deeper than can be handled by the bailout, but that doesn't mean the bailout doesn't do some good," he said.

He said a bailout might help restore some confidence to the stressed financial system.

"What creates a crisis is a lack of confidence," he said.

He said the housing crisis was primarily a policy failure by U.S. authorities.

The U.S. government was "totally blind" to it, regulators failed to monitor the mortgage industry properly, and the U.S. Federal Reserve had very low interest rates at a time of the greatest housing bubble of all time.

While homeowners should take some personal responsibility for the debacle, they were being goaded into the fervour by an establishment that endlessly pushed an ownership society.

"They were doing what was considered right at the time," Shiller said.

In his current book, The Subprime Solution, Shiller proposes several measures to reduce bubble conditions in the housing market, including better information for prospective buyers, and broader markets that trade risk better.

Shiller said he does not have another bubble in his sights as the U.S. economy will be "damaged for years."

"The housing bubble was of record proportions," he said. "Maybe the next big bubble will be your children's or grandchildren's . . . The excitement we had in the 1990s and in 2000 in the housing market is a fragile thing and it won't come back for some time."

(prepared by Jacqueline Thorpe, Canwest News Service, Derrick Penner, Vancouver Sun, With files from Derrick Penner, Vancouver Sun, Canwest News Service; Vancouver Sun)