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Canadian Housing Bubble Could Rile U.S. State Markets

Canada may soon face a housing bubble crisis not unlike the one still felt by its southern neighbor, according to a report by ""Capital Economics"":http://www.capitaleconomics.com/, with a possible burst threatening to soak pockets of the U.S. economy that rely on purchases by overseas homebuyers.


Titled ""Canada Economic Focus,"" the report forecasts a decline in nominal house prices by as much as 25 percent on a cumulative basis over the next two or more years.

""The recent housing boom has resulted in the largest rises in house prices ever seen in Canada,
which have been similar in magnitude to those during the recent boom in the US [sic],"" the report says. ""Unfortunately, the subsequent falls in prices could also be just as severe as those elsewhere.""

It goes on to suggest that a house price collapse would erase growth responsible for raising home prices to new highs in the northern country and place Canada in line with others, such as its southern neighbor, which continues to walk a blurry line between recovery and a double-dip recession.

Describing the housing bubble in Canada, Paul Dales, senior U.S. economist at Capital Economics, says that the ""housing market is unusually strong, price is out of line with fundamentals like disposable income, and people believe this can carry on forever when in fact this is never the case.""


Asked how this would impact the still-limping U.S. housing economy, Dales highlights the potential for a disproportionate loss in home purchases in areas where Canadians typically buy, lease, and rent vacation homes.

""If the housing market goes weaker in Canada, I suspect there will be fewer people willing or able to buy a second home in the U.S.,"" Dales says.

A May ""report"":http://www.realtor.org/research/research/international_home_buying on international home buying activity by the ""National Association of Realtors"":http://www.realtor.org/ found that Canadians grabbed U.S. homes more than any other nationality for the fourth consecutive year, cutting into 23 percent of foreign home sales. According to the report, which relies on information collected from realtors, 28 percent of agents saw international home purchases in all but one state this year, with Florida the most popular among Canadians, followed by California, Texas, and Arizona for other foreign homebuyers.

Citing his own research, Dales points to Florida and Arizona as the states with home sales that would suffer a ""modest impact"" if Canadians suddenly faced fallout from a housing bubble burst. He ascribes one percent of international home sales in the U.S. to Canadians.

The grim forecasts about the U.S. neighbor's housing economy follows a 2010 ""report"":http://www.dsnews.com/articles/report-how-did-canadas-housing-market-dodge-bullet-2010-09-18 by ""Center for American Progress"":http://www.americanprogress.org/ associate director David Min, who praised the influence of an effective regulatory regime in Canada for its role in shielding the northern housing sector from the worst effects of the financial crisis.

""Canada did not become enthralled with the laissez faire ideology that dominated U.S. economic policy making in the 2000s, and thus did not allow major gaps in its regulation of housing finance to develop,"" he wrote.

Speaking to _MReport_, Min downplays the potential for an overspill in the instance of a house price collapse in Canada, suggesting problems only if these losses reached ""their banking institutions... which could create more global turmoil, a domino effect.""

Nonetheless, he adds, ""I think it's unlikely that you're going to see the scale of the housing and financial crisis that we saw in the U.S."" in Canada.