The Canadian housing market will avoid a crash similar to the one experienced in the United States, thanks to more conservative housing policies north of the border, a new report from the C.D. Howe Institute suggests.

The report on the risk of a Canadian housing bust, by Jim MacGee, an associate professor of economics at the University of Western Ontario, acknowledges that recent swings in Canadian house prices have raised concerns that a U.S.-style housing bust is looming.

But upon comparing policies and housing market conditions in Canada with those in the U.S., the report concludes that there is little likelihood of a U.S.-style surge in foreclosures or a collapse of house prices in Canada.

In the report, MacGee points out that between 2000 and 2006, U.S. prices appreciated nearly twice as much as Canadian houses, before plummeting by more than 30% between 2006 and 2009.

The decline of house prices in Canada has been much softer. Canadian house prices continued to appreciate until late 2008, before declining by roughly 9% between August 2008 and April 2009. Prices then rapidly bounced back, returning to their pre-recession high by the end of 2009, and continuing to surge in the spring of this year.

The more drastic boom and bust in the U.S. market was largely driven by a decline in underwriting standards and much more widespread subprime lending in that country, according to the C.D. Howe report. It notes that the deterioration of underwriting standards caused U.S. mortgage delinquencies to begin climbing even before the recession began, whereas delinquencies in Canada did not begin rising until the economic slowdown had set in.

“An essential part of government mortgage insurance programs is minimum underwriting standards, which reduce the incentive for banks to lower underwriting standards to generate loan volume,” MacGee says in the report. “Compared to the U.S., Canada has maintained tighter conditions on government backstopped insurance against mortgage default.”

Looser U.S. standards resulted in both private insurers and government-sponsored enterprises boosting their exposure to high-risk mortgage products such as low-documentation, interest-only and adjustable rate mortgages. The rise of these products became “a key factor in the U.S. housing market crash,” the report says.

In contrast, Canadian policymakers effectively discouraged the build-up of these high-risk mortgages.

“Canadian housing policies, which avoided the sharp decline in underwriting standards seen in the U.S., worked well in reducing the possibility of a housing bust in Canada during 2008-2009,” the report says, “and continue to mitigate the risk of a massive wave of defaults in the future.”

IE