Economist debate whether US property market plunge will cross into Canada

As the US government continues to battle to put together a financial package to prevent recession economists are divided over whether or not the property market crisis is going to cross the border into Canada.

Canadian households are nearing the financial tipping point that Americans reached two years ago, which plunged their housing market into crisis, according to David Wolf, senior economist with Merrill Lynch Canada.

He believes it may just be a matter of time before the Canadian housing market tanks like the US market did. 'What worries us is that Canadian households have been running a larger financial deficit than households in either the US or the UK,' he said.

Figures show that in 2007 Canadian household net borrowing amounted to 6.3% of disposable income, which was higher than in Britain and not far off the 7% peak in the US in 2005, prior to the bursting of that country's housing bubble.

The concern of a deep housing market meltdown in Canada was dismissed as unwarranted by Canadian Prime Minister Stephen Harper. 'We will not see such a situation here,' he said stressing that both the housing and consumer markets and financial institutions in Canada are much stronger.

But Wolf is not the only economist to warn that growing mortgage debt combined with housing price declines is a cause for concern. A study from BMO Capital Markets said that housing prices in Canada need to fall nearly 10% per cent more than they already have to bring them back into line with household incomes.

And a report from the University of British Columbia said that in some major cities prices would have to plunge 25%.

While the 'best days' for Canada's real estate markets may be over, comparing the Canadian outlook to the US housing meltdown is the wrong approach, according to economists at the Bank of Nova Scotia.

In a report Derek Holt, vice-president of Scotiabank's economics department, and his colleague Karen Cordes, cite several reasons why the Canadian mortgage market is healthier than that of the United States.

Overall they conclude that Canada's subprime market is much smaller than in the US, mortgage interest is generally not deductable against tax, as in the US, the market retains a much higher homeowner equity and Canadian mortgages are funded, underwritten and enforced in a totally different manner.