Not Here? Housing Market Policy and the Risk of a Housing Bust
August 31, 2010
Can a US-style housing bust happen in Canada? Recent swings in Canadian house
prices have raised concerns about the possibility. To evaluate the likelihood of a US-
style housing market crash in Canada, the author examines what caused the US
housing boom and bust from 2000 to 2009.
decline in underwriting standards played an essential role in the US housing
market boom and dramatic bust. While monetary policy was very similar in both
countries from 2000 to 2008, housing markets (especially the subprime component)
were structured and regulated differently in each.
Canadian housing policies, which avoided the sharp decline in underwriting standards
seen in the US, worked well in reducing the possibility of a housing bust in Canada during
2008-2009, and continue to mitigate the risk of a massive wave of defaults in the future.
The author would like to thank Finn Poschmann and Philippe Bergevin for helpful comments, as well as Ben Dachis,
Thor Koeppl, Angelo Melino, Angela Redish, Nick Rowe and anonymous reviewers at the Bank of Canada and the CMHC.
See, for example, Wolf and Kwan 2008.
Both series are based on repeat sales, making these series a closer approximation to a “constant-quality” price index of nominal
home prices than average house price sales.
Recent swings in Canadian house prices have raised concerns that a US-style housing bust looms on the
A comparison of housing market policies in Canada versus the US, however, suggests that there is little
likelihood of a US-style surge in foreclosures or a collapse of house prices in Canada.
Many of the concerns about the Canadian housing market are motivated by recent US experiences. Over the
years 2000 to 2006, US prices appreciated nearly twice as much as Canadian houses (Figure 1 plots the United
This rapid appreciation has been followed by an equally rapid decline, as US house prices declined by
over 30 percent between 2006 and 2009, before staging a modest recovery late in 2009, only to fall into the
doldrums again this year.
The decline in Canadian house prices lagged the US, and was more muted, as house prices continued to
appreciate until late 2008, before declining by roughly 9 percent between August 2008 and April 2009. This
decline was followed by a rapid bounce back, with house prices returning to their pre-recession high by the
end of 2009. After another price surge in the spring of this year, buyers and sellers remain on tenterhooks
about the future path of prices.
To evaluate the likelihood of a US-style housing market crash in Canada, one first needs to understand what