Watching the American subprime housing crisis, you get the idea it can’t happen here. We have no flood of subprime mortgages defaulting and driving lending institutions into insolvency. Our residential real estate markets are not overwhelmed with properties on which no one will bid. We don’t have a flood of houses sold with very low interest rates due to reset at four to ten times initial interest costs, driving out those who can’t afford to pay the higher bills.

But could it happen here? Yes, and it is worth considering the means and the consequences. Indeed, in the early 1980s when interest rates were in double-digit levels and some mortgages were floating at rates pushing 20%, it did happen. Folks who had houses and condos in which they had little equity just walked away, leaving lenders to repossess them. Small lenders were also being hurt by high interest rates and several trust companies, having unwisely financed long-term loans with their own short-term borrowing, went bankrupt. Some financial wizards retired. A few others, linked to fraudulent schemes, went to jail. The property market in Ontario, the centre of what was called the “trust companies fiasco,” took a couple of years to recover.

Today, if Canada does have a housing crisis, it is likely to be in areas in which house prices have risen far above people’s ability to afford them. The Lower Mainland of B.C., Saskatoon, Edmonton and the Alberta oil patch, and a few chunks of very pricey Toronto real estate could suffer some losses. Winnipeg, in spite of a recent house-price mini-boom, is still one of the most affordable in Canada. Whatever crisis might develop in Victoria or Calgary is not likely to happen in the ‘Peg

Let’s look at one spot in the U.S. housing market implosion: Cleveland. In a suburb called Maple Heights, a collection of middle- market, ageing homes, 8% of the homes are foreclosed. The city cuts the grass, but entrepreneurial types invade vacant houses, rip out copper wire and pipe and hardwood floors and panels, and leave what is left as uninhabitable. With so many houses vacant, the property tax base has shriveled.

Maple Heights is not an example of speculative madness coming back to earth. That is a problem in parts of California and south Florida where investors tossed money at condos that were only sketches on an architect’s pad, then waited for construction and the chance to flip homes on which they had just made the deposit to reap big capital gains.

Maple Heights is more like Newark, N.J., the crime-infested neighbour of Manhattan where, in the late 1950s, so many middle-class people had fled that the property tax base shriveled. Newark’s government, known for its ability to take kickbacks and bribes and make nice to organized crime, raised residential property taxes to such a level that a $10,000 house had a local property tax bill of $662. Not surprisingly, the middle-class fled to towns with lower taxes.

Tax creep is inevitable. When businesses close and homeowners flee, the decline accelerates. Cut half the taxpayers out of a jurisdiction and taxes that must be paid by the remainder will double. Cut the number in half a again and it doubles again. The process is geometric and the pace quickens with rising abandonment.

It could happen in Canada. A profound economic downturn could trigger it. The problem would show up where homeowners have little at stake. That would tend to be in new subdivisions and infill housing in gentrified parts of cities. This is Canada, so mortgage insurance, a requirement of highratio mortgages, would cover lenders’ risk. But the homes would still be abandoned.

It’s a risk that deserves to be understood. The higher the loan ratio, the riskier the property. Lenders know it and homeowners should understand it. The wise buyer should consider whether there is significant risk that an area might suffer a high rate of home abandonment from high taxes or recession. An upscale neighbourhood with nothing but single-family homes of reasonable size is unlikely to tip into widespread foreclosure. Neighbourhoods with tracts of speculative homes, others with giant houses that could be tough to finance and tougher to resell in hard times tend to be more vulnerable.

Credit crunches are cyclical, but they spread their tentacles widely. When house prices collapse, most people feel poorer. They cut spending, deepening the crisis. Canadian mortgage lenders, most of whom have not been seriously injured by the U.S. subprime mess, are nevertheless being extra careful with mortgage loans. Less money for lending means less buying. The market is becoming less liquid, widening the spread between what vendors ask and what buyers will pay.

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