With house prices falling, Australia is entering unknown territory.

Nervousness is gripping the nation. The housing finance data that came out on Friday will only add to that nervousness. A 3.8 per cent fall in lending for housing in just one month? That is huge.

But we don’t need to go forward with eyes closed. Just across the Pacific is a country we can learn from.

Canada’s housing market is a lot like Australia’s. Like us, Canada had no major fall in house prices during the Global Financial Crisis. Like in Australia, official interest rates fell, making borrowing very cheap. House prices soared and household debt went with them.

Older and wealthier Canadians got caught up in a frenzy of investment while the younger portion worried about affordability. It could almost be Australia, right?

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The epicentres of the boom were Toronto, Canada’s biggest city, and Vancouver, on the Pacific Coast. Their enormous house price boom continued until 2017. Then, while Australia was still appreciating, Toronto suddenly stopped.

Toronto house prices entered a dramatic fall.

“‘The frenzy is over’: Toronto’s housing bubble finally pops,” screamed the headlines.

It sure looked that way. Toronto’s house prices fell fast. For two consecutive months in late 2017 houses were losing 3 per cent of their value a month, as this next graph shows.

What happened next is the surprise. The fall promptly stopped. Toronto stabilised and then prices kept going up.

I don’t want to say that will happen in Australia too. I can’t predict the future. But a lot of people are claiming they can predict the future just because they predicted the falls so far.

In pubs and in Ubers and in dark corners of the internet, you find a group of Australians arguing the fall we’ve seen so far is just the first tentacles of a giant house price crash octopus that will burst in and tear everything we love apart.

Could be. But let’s sense-check that. I’d gently suggest the example of Toronto shows the dangers of extrapolating. Trends can turn.

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Remember — in a market where people expect price growth, even a short fall can make a big difference. The relatively brief fall in prices in Toronto was enough to make it far cheaper than Vancouver, where prices went up uninterrupted, as the next graph shows.

Toronto swiftly went from being 6 per cent cheaper than Vancouver to 16 per cent cheaper.

VAN CITY BLUES

As mentioned, Canada and Australia are similar — medium-sized, wealthy countries dependent on resources exports. Safe, stable, English-speaking democracies with similar desirability for Asian investment. Investment that both countries have managed with special taxes. Canada’s interest rates are 1.75 per cent compared to Australia’s 1.5 per cent. The list goes on.

But there are differences too. Canadian homeowners mostly have fixed rate mortgages, making them less vulnerable to mortgage rate rises. And Canada has absorbed a few official interest rate rises already, while Australia’s rates remain at record lows.

We can’t be sure all the factors affecting housing are the same. So long as Vancouver was continuing to rise as Melbourne and Sydney fell, Canada and Australia looked different.

So it is especially interesting that in the past few months Vancouver has shown the first few signs of price falls. They are small so far, but there have been other signals. Just like we follow auction clearance rates, Canadians watch house sale volumes. The number of homes sold in Vancouver in October 2018 is more than 33 per cent lower than October 2017.

There is enough weakness in Vancouver to ask whether it might be about to tip over. I suspect there are a lot of eyes in Vancouver focusing on what has happened in Sydney and buckling their seatbelts. A fall in Vancouver could take Toronto down on another dip too.

If four major cities in Canada and Australia all start falling in synch, it would be enough to start to suspect that they are all at the mercy of the same global forces — interest rates and liquidity. If you want to have a full picture of what will happen in Australia’s housing market, add Vancouver and Toronto to the list of cities you keep an eye on. Canada’s spring selling season is coming up in five months and it will be very interesting.

Jason Murphy is an economist. He writes the blog Thomas the Think Engine