Given that, why does it matter if someone in Canada had a $200K home and the market dropped 30%, v.s. someone who had a $2M home and the market dropped 30%? Surely their earnings were priced into the loan?
Or is the Canadian real estate/loan market so insane that nobody asks you if you can plausibly pay for the loan you're taking?
If you're making $300K per year and you buy a $1M house, then yes, a loss of $100K-$200K is probably manageable. However, a lot of people don't make that much money. What they did is scrap together a down payment, sometimes borrowing from Mom or Dad. They get a mortgage payment they can just afford on a salary of $100K.
The other thing that happens is that some people will get a 2nd loan to cover the down payment requirement. There are regulations against it, but it does happen.
So it's actually easier for foreigners to speculate on real estate in Canada.
One of the problems is that if a foreign owner ends up underwater after a correction they can easily just walk away.
Disclaimer: not sure this is how US/Canadian mortgages actually work, but this screwed lots of people in a certain financial crisis I know of.
One of the biggest differences between Canada and the US is 30 year terms for mortgages. They are standard in the US and allow you to lock in a fixed rate for pretty much the rest of your life.
In Canada, they still do 30 year amortization, but loans are typically 5 year. You can get 1 year sub-prime loans with very low rates or 10 year fixed with higher rates. The 5 year is the most common.
What this means is that you don't get to enjoy a fixed rate over your lifetime. Get a mortgage for 4%? Great, it might be 7% 5 years from now. In other words your monthly payment could increase substantially.
Since you need to reapply for a mortgage in Canada, the banks will reassess the value and make sure you have enough collateral. I have heard of people refinancing after a downturn and the bank asks for another $5K to $20K to make sure you have the minimum 20% equity.
Mortgage loans typically have 2-10 year periods of discount or fixed rate (with the lowest interest rates normally found on the 2 year plans), then they revert back to the 'standard variable rate' which is significantly more expensive, and subject to change at very short notice. To keep a low interest rate you have to reapply for your mortgage every few years to get a new deal, and with reapplication comes the requirement to have a certain percentage of equity to loan.