Last Thursday, the Canadian Mortgage and Housing Corporation (CMHC), Canada’s version of Fannie Mae, purchased $5 billion Canadian dollars ($4.17 billion in U.S. dollars) worth of mortgage-backed securities so that the country’s banks would have enough cash to continue lending.

CMHC said it might purchase as much as C$25 billion in mortgages eventually, another sign that Canada’s banking industry—which the World Economic Forum recently identified as the soundest financially among industrialized nations—is not immune from the virus that has infected the global credit markets.

That crisis is having an impact on Canada’s housing market, which after a six-year boom is finally slowing. The number of existing homes for resale is rising, and house prices are receding. But most industry watchers are convinced that prices won’t erode anywhere near as steeply as they have in the United States, and that conservative and better-regulated lending practices are keeping Canada’s home builders and consumers from suffering the same fate as Americans.

But not everyone buys into this forecast. Economist Robert Shiller of Yale University and the S&P/Case-Shiller housing price index fame, says he’s seeing signs of price bubbles in several of Canada’s hot markets like Vancouver and Calgary. Benjamin Tal, an economist with the bank CIBC, expects home prices across Canada to fall between 5 percent and 10 percent through mid-2009, and for sales to drop 20 percent.

Merrill Lynch Canada caused a stir last month with a report warning that Canadian households are as overextended with debt as those in the U.S. and the United Kingdom. “We cannot understand how one can dismiss the risk that an adverse feedback loop between the housing market and the financial sector could produce a rather worse outcome for both in Canada than the sanguine consensus currently expects,” wrote David Wolf, the report’s author.

Canada’s newly re-elected prime minister, Stephen Harper, felt compelled to publicly repudiate the report’s conclusion, which he interpreted (incorrectly) as predicting a meltdown in Canada’s housing and credit markets.

So far, at least, Canada appears to be easing, rather than crashing, into its housing downturn. CMHC projects that housing starts in 2008 will decline 5.6 percent to 215,475 units. Next year, housing starts are expected to fall below 200,000 for the first time in eight years, and decline by 9.9 percent to 194,100.

Single-family starts will drop below 100,000 for the first time since 2001 if, as projected, they fall by 17.7 percent to 97,925 this year and by another 4.8 percent to 93,225 units in 2009.

This biggest falloff is expected to occur in the province of Alberta, whose housing market over the past several years has been driven by its oil economy. CMHC estimates starts in Alberta will be down 43.1 percent in 2008, and by 11.5 percent in 2009.

The resale market is also in flux, but in ways that aren’t always easy to translate. The Canadian Real Estate Association (CREA) said last week that 10.7 percent fewer existing homes were sold in Canada during the summer months, compared to the same period a year ago. At the same time, new listings were up 6.5 percent, year-over-year, which caused prices to fall during this period by nearly 5 percent to C$319,969.

Still, Gregory Klump, CREA’s chief economist, told the Toronto Star that all signs point to a soft landing for Canada’s real estate markets. “In the U.S., you have a surging number of properties available for sale, and in Canada it’s recently declined. [The U.S. has] distressed sales, rising defaults, rising disclosures. In Canada, it’s not really a market feature,” he said.

Indeed, CMHC projects that prices for homes on multiple listing services will rise this year by 3.3 percent, and by another 3 percent in 2009. And at least one custom builder sees little evidence that demand for higher-priced house is waning. “The last house that sold in our neighborhood—a bungalow which listed for C$840,000 and sold for C$914,000—is being torn down for a C$3 million house,” says Steve Greer, who owns Harvis Barklay, a Toronto-area builder that starts three or four houses a year priced between C$2.4 million and C$4 million. He tells BUILDER that many of his buyers are younger entrepreneurs who are benefiting from a thriving economy whose national employment rates are near record levels.

Greer, who is 42, can recall when Canada’s housing market wasn’t so good. In the 1980s, interest rates rose above 20 percent; in the 1990s, there were “huge amounts” of speculative building and buying, which caused prices to fall by as much as 40 percent in some markets. “Canadians remember that very well, and there’s not a lot of spec building going on now,” he says.

Greer and others are pretty much in agreement about why Canada’s housing and credit markets haven’t deteriorated as badly as those in the United States. One major difference between the two countries has been that Canadian banks didn’t fall in love with subprime lending, “and didn’t compromise their underwriting standards,” says Stanley Hamilton, a professor with the Sauder School of Business at the University of British Columbia. Consequently, Canada hasn’t seen massive numbers of mortgages lapse into delinquency or foreclosure, he explains.

(, a Web site offering financial research and analysis, noted recently that the portion of mortgages held by Canada’s seven largest banks that were at least three months in arrears was only 0.27 percent in July. And CREA noted recently that delinquencies in British Columbia were at their lowest levels in a decade.)

Canada’s banks insist that buyers provide more equity than American banks typically require. If a buyer puts down less than 20 percent of the price of the house, he must also purchase mortgage insurance through CMHC, which Hamilton says can cost 1 percent to 1.25 percent of the mortgage. And mortgage interest in Canada isn’t tax-deductible, so most buyers aren’t purchasing a house so much as an investment than as a place to live.

It’s also worth noting that Canada’s housing market isn’t controlled by giant public builders the way America’s market has been and hasn’t experienced the kinds of overbuilding in hot markets that ultimately led to price erosion in places such as Phoenix and San Diego.

(Hamilton says a “large builder” in Canada would start around 600 homes per year, and that their growth is restricted somewhat because there aren’t a lot of huge land tracts available for development. BUILDER was unable to reach for comment officials from Canada’s leading production builders, including Greenpark Homes, which is the country’s largest builder but confines its construction to Ontario; Great Gulf Group, and Mattamy Homes.)

It remains to be seen how well Canada’s housing market weathers the larger financial crisis. But there is certainly potential risk in the fact that so much of that market’s recent growth has come from the sales of multifamily homes. Condos in particular “have made big inroads,” says Hamilton, which might not be good news when one observes how aggressive condo construction led to disastrous oversupply in places like Miami and Chicago. Hamilton points out that two or three condo projects in Vancouver “are not going to be completed.”

There is also risk in the fact that two-fifths of Canada’s new-home construction in urban centers occur in one province, Ontario, where builders are banking on projections that the population of Greater Toronto alone will increase by 37.5 percent, to 7.7 million, by 2025. The wisdom of placing so many eggs in one market’s basket might determine how well Canadian builders in general hold up.

Lastly, there’s the question about how far home prices will fall in Canada before they hit bottom. Hamilton tracks prices in Greater Vancouver and constructs a monthly index using 2001 as its base of 100. In Greater Vancouver, the price index over the past five years through September 2008 was up 78.6 percent. Hamilton foresees prices falling by about 8 percent to 9 percent this year, and another 5 percent next year. He’s expects the same trends to mainfest themselves in places such as Calgary and Toronto.

Greer, too, doesn’t fear Canada’s housing market falling off the same cliff from which bad mortgages, inflationary pricing, and rampant overbuilding have pushed America’s builders. “Prices in Canada today are not overvalued, most sales today are resales—so there’s not a lot of unsold new inventory—and mortgages are not overleveraged,” he says.

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Chicago, IL.