by Nouriel Roubini and Rachel Ziemba
Forbes.com

Canadian banks were conservative enough to avoid the excesses of their U.S. counterparts in recent years, due in part to a consolidated financial sector and strong regulation. Armed with strong balance sheets, these banks continued to lend throughout the recession and helped keep financial stresses in Canada from reaching the levels of their G7 peers.

Yet there are signs that the banks’ balance sheets don’t look quite as strong anymore. Canadian households have rushed to get mortgages and refinance at record low rates; the average mortgage rate was well under 5.0% in September 2009. Banks were more than happy to extend loans, particularly after the government’s purchases of the already-insured long-term mortgages helped unlock long-term capital for the banks.

Although Canadian housing markets weakened in late 2008 and early 2009, particularly in the overheated western Canadian cities, low interest rates, capital inflows, increased liquidity and a reduction in bank lending standards have helped reverse the trajectory. Housing starts, prices and sales have rebounded, despite remaining below their 2008 highs. This improvement is both a trigger and a symptom of the strong domestic demand that has helped Canada exit the recession. The fact that Canada had less excess housing stock than the U.S. is a further support. But recent moves could be overly optimistic.

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