Why is the Canadian housing market so healthy?

As housing prices continue to rise, Canadians will need to stay grounded to maintain growth. 

What a difference a year makes. Last year at this time, the Canadian housing market was in a deep funk. Fear stemming from the U.S. subprime loan and economic crises flowed north. And locals, worried about their jobs and stock portfolios, battened down the hatches. Existing home sales plunged, as did average selling prices.

But just 12 months later, almost all of the numbers that were down are trending up again. And while no one knows just how long it will last, recovery seems at hand.

There are several reasons Canada's economy and its housing sector bounced back so quickly. For one, Asian economies, many of which never suffered as badly during the recession as the United States and Europe, continue to demand vast quantities of Canadians resources. Unlike the United States, Canada also benefits from the fact that its armed forces do not drain away between five and nine per cent of its Gross Domestic Product (GDP) each year.

However, the biggest reason Canada has done so well is the relative strength and sound management of its mortgage and banking industry, which the World Economic Forum has rated as the soundest in the world. In fact, according to one forecast, that industry is about to get a whole lot bigger during the coming year.

Comparing the U.S. and Canada

Last week, the Canadian Association of Accredited Mortgage Professionals published the fifth edition of its Annual State of the Residential Mortgage report. In it, Will Dunning, the organization's chief economist, predicted the mortgage market will surpass the $1 trillion mark by this time next year. That's almost as much as Canada's entire GDP this year.

A sound mortgage industry is a key component of a strong housing sector, which needs a steady supply of cash to fuel demand for its products.

However, according to one expert, while mortgage lending in Canada is big business, it is generally done far more prudently here than in the US. Canadian financial institutions did not fall into the trap of forwarding money to as many doubtful borrowers as American financial institutions did. This conservatism meant Canadian financial institutions generally avoided the huge write-offs taken by their southern cousins. Thus, they are now better able to maintain lending to consumers and, most importantly, to the small businesses which create the lion's share of new jobs in the country.

By Peter Diekmeyer, Bankrate.com

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