Canada is used to being overshadowed by it’s much larger southern neighbor: America has more people, more money, and a much larger army. But the U.S. also beats out Canada in many categories that it would rather not win, like the number of financial crises. Since 1840, the United States has suffered from 12 financial panics, while Canada has had zero.
But over the past several years, observers have wondered whether this streak would continue as a real estate bubble of American proportions has been inflating across Canada.
A bursting of the real estate bubble could blow a $17 billion hole in the Canadian economy, according to Moody’s Investor Service, which sees losses split between the banking sector and the insurance industry.
Fortunately for the Canadian economy, that’s Moody’s worst-case-scenario estimate and an American-style financial crisis isn’t likely in the offing, because of differences between the American and Canadian regulatory systems.
In Canada, mortgages are explicitly backed by the government, whereas most mortgages in America were backed by Fannie Mae and Freddie Mac, which were nominally private companies before the financial crisis. Second, if homeowners in Canada aren’t able to put down 20% of the cost of a home at the time of purchase, they are legally required to buy insurance, a rule that would have prevented the subprime mortgage crisis back in the U.S. Finally, homeowners in Canada typically refinance their loans every five years, which places much more of the risk of a fall in prices on homeowners rather than banks, reducing the chances of an American-style banking crisis.
Still, household debt in Canada is at 120% of disposable income levels, a higher ratio than it was in America at the height of the real estate bubble. If interest rates were to start to rise, it would likely put many homeowners in a position where they are unable to make their monthly payments. The ensuing foreclosures could put a real damper on the Canadian economy, even if the bursting of the bubble doesn’t trigger a financial crisis.