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Sound the alarm. There’s a threat at the border. Signs of strain in Canada’s housing market and bearish economic data suggest the US malaise is spreading north. Last week’s employment numbers showed the largest monthly loss of jobs in Canada for 17 years, while June marked the first year-on-year fall for house prices in almost a decade.

Is Canada set for a rerun of American house price misery? Canadian lending standards did not deteriorate to the same extent. Subprime loans accounted for less than 5 per cent of originations in 2006, compared with more than a fifth in the US. Canadian homeowners facing mortgage rate resets, with renewal rates higher for the first time in nearly two decades, should be in better shape. Lenders, alarmed by US carnage, may have tightened up. But credit has not been squeezed in quite the same way.

Still, after a long stretch where the housing market caught up to rising incomes and lower interest rates, valuations and homebuilding have now raced ahead of themselves. House prices relative to rents are 25 per cent above the long-term average, according to Merrill Lynch, while the average Canadian house fetches more than four times average household income. Canadian developers have been building more houses than needed to match household formation for six years on the trot.

Moreover, the fate of Canada’s housing market, along with its economy, is linked to commodity prices. Where local economies have benefited most from the resources boom – Alberta, British Colombia and Saskatchewan – housing markets show the greatest signs of overvaluation and oversupply. Benign predictions of a flattish period for prices nationally may mask sharp local falls. With real interest rates close to zero, the Bank of Canada has little room for manoeuvre, though the inclusion of (falling) house prices in inflation data could ease that bind. Canada is not yet on red alert. But border guards are rightly anxious.

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