Canada is facing a massive housing bubble after more than two decades of cheap money and lax lending standards. And with a widespread affordability crisis, the country is now at
largely followed the Federal Reserve, despite the substantial economic differences at the time. Canadian consumer price inflation remained relatively subdued until more recently, so there was little impetus for tight monetary policy at the time. In that environment, persistently low interest rates drove home prices ever higher.
Lenders are reporting an alarming increase in the number of homeowners unable to fulfill their mortgage obligations once their interest rates were reset higher. Several major Canadian banks have reported that roughly one-fifth of their outstanding mortgages now have negative amortization, which occurs when payments no longer cover interest obligations, forcing lenders to increase the principle and extend the mortgage term.
Many also suggest that low inventories will put a floor under home prices, although there is little support for this argument. The construction of new housing units has significantly outpaced the increase in household formation over the past few decades. It would not be long before the impact of this is visible in the markets. Meanwhile, the number of completed homes that are unsold is low, but this will rise as investment demand cools.