John Shmuel, Financial Post

Canada’s housing market is expected to cool off this year and next, but isn’t at risk of falling victim to a U.S.-style foreclosure crisis anytime soon, says a new report by debt-rating firm DBRS Ltd.

DBRS says in the report Canada will continue to fare well in comparison to its U.S. neighbour when the Canadian housing market corrects itself and interest rates are tightened. That is because lending practices here are much more sound than in the U.S. market.

“The likelihood of us having the kind of situation they had in the U.S. is extremely low,” said Jerry Marriott, managing director of structured finance at DBRS. “It’s a combination of the lending practices prior to the peak in 2007 — they were more restrained, so there were better underwriting practices in Canada. We also think there are a number of factors in the Canadian market which have lent themselves to more prudent lending.”

Those factors include less aggressive lenders as well as systems designed to keep people paying their mortgages.

Mr. Marriott said a cooling effect is gradually taking hold in the housing market as credit availability begins to tighten, and the HST factors into home buying decisions in Ontario and British Columbia.

That means there’s a greater likelihood this year that there will be a correction in housing prices rather than a continued increase. Mr. Marriott said DBRS expects the market to cool throughout the year and continue to cool into 2011.

“If you add up the factors you would look at as to whether there’s going to be further price increases or the potential for a correction, we don’t see there’s a lot of factors supporting further price increases,” he said. “But there are a number of factors that show there might be some moderation in housing prices.”

That may bode well for potential buyers after a report by Canadiahn Imperial Bank of Commerce this week said that on average, Canadian home prices are 14% over their “fair” value. That represents about 1.5 million homes, or 17%of all dwellings.

The report also highlights that households continue to have a high level of debt, something DBRS says is part of an ongoing trend. But it tempers that by adding that household debt is not as worrying as some analysts have suggested.

For instance, the debt-to-disposable income shows Canadians are generally more indebted than Americans — but the report says this doesn’t reflect certain differences between the two countries that affect income, such as the fact that the United States has lower taxes but Americans pay more toward health-care bills.

Overall, mortgage lending in Canada reached $958.8-billion at the end of 2009. That’s more than double the $414.1-billion 10 years ago. When including home-equity lines of credit, outstanding mortgage-related credit was more than $1-trillion.

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