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Will ghosts of housing crashes past haunt Canada?

PART ONE OF BNN'S WEEK LONG SPECIAL COVERAGE: RISKS AT HOME 

Edward Saxe experienced Toronto’s last housing boom and bust cycle.

During the housing boom of the late eighties the veteran Toronto real estate appraiser worked around the clock. When the founder of Edjline Appraisal Services bought a family home in North Toronto in 1989, he experienced the bust.

“I bought my property in October, moved in in May and between the time I purchased and the time I closed it had probably dropped 25-to-30 percent in value,” Saxe told BNN.

It turned into one of the most severe housing busts in recent memory. Between 1989 and 1996 prices in the Greater Toronto Area collapsed. In some neighborhoods, prices for some homes were cut in half. It would be more than a decade before they returned to their peak.

Some observers are warning Canada’s housing markets are again overheated and poised for a correction. Earlier this year the Organisation for Economic Co-operation and Development declared Toronto housing is at risk of a sharp fall. It also issued a warning about Vancouver’s real estate market.

Those sentiments have been echoed by the Canada Mortgage and Housing Corporation. In November, Canada's federal mortgage insurer said the Toronto, Winnipeg, Saskatoon and Regina housing markets were showing evidence of “problematic conditions.”

But others say this time is different for Toronto. The Toronto crash of the early nineties was brought on by a crippling recession that drove Canadian unemployment to its worst level in years. It was also accompanied by double-digit interest rates as the Bank of Canada tried to tame rampant inflation.

And while the crash is little more than a distant memory, it has some lasting effects. In an effort to stimulate the housing sector, Ottawa introduced measures allowing first-time home buyers to borrow money from their RRSPs. The measure is now a staple of the Canadian housing market.

The factors that spurred the last housing downturn are not in place now, according to Peter Norman, chief economist at real estate consultancy Altus Group. “We don’t see the same cocktail -- in any way -- of factors that we saw back in the early 1990s,” he told BNN.

CIBC economist Benjamin Tal agrees there is little chance of a 90’s style meltdown for housing in Canada. However, that could change if inflation creeps up and forces the Bank of Canada to act aggressively. “When you chase inflation you overshoot and you kill the economy,” he warned.

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