On Tuesday Statistics Canada reported that the debt-to-disposable income ratio for the average Canadian is 165%, near record highs. For every $1 of disposable income, the average person now has $1.65 in debt. Canada has seen the largest increase in household debt relative to income of any major developed country since 2000.

Worryingly, the parliamentary budget office also recently released a report predicting that debt levels will continue to rise over the next five years as interest rates normalize. “Household debt-servicing capacity will become stretched further as interest rates rise to ‘normal’ levels over the next five years,” the report said. “Based on PBO’s projection, the financial vulnerability of the average household would rise to levels beyond historical experience.”

High debt levels aren’t the only issue either. Is the Canadian economy teetering on the edge of ruin? If so, how should you invest?

A mortgage crisis waiting to happen

Total household debt last quarter, including both consumer credit and loans, now totals $1.9 trillion. However, most of that ($1.3 trillion) is mortgage-related debt. That could present a major headwind should the growth in home prices start to slow.

According to real estate company Royal LePage, “Demand for expensive luxury homes in [Vancouver and Toronto] is at the highest on record so far this year.” Average housing prices across Canada are up 60% since 2008 with the hottest markets seeing prices rise over 100%.

According to Bank of Montreal (TSX:BMO)(NYSE:BMO), the rapidly rising real estate market will end poorly for consumers, lenders, and the economy as a whole. “Odds are that if this kind of price growth continues, it will end badly,” a bank analyst said in a research note. Bank of Canada governor Stephen Poloz has said that over 720,000 households could struggle to make debt payments during a downturn.

For now, newly implemented federal regulations designed to slow down price gains has helped delay a collapse. These rules, which were introduced in February, require higher minimum down payments on certain properties. The minimum down payment for new mortgages above $500,000 doubled to 10%. The minimum down payment for homes over $1 million remains unchanged at 20%.

Still, the average mortgage interest rate has fallen from 6.7% in 1999 to just 3.1% this year, fueling the rampant accumulation of mortgage-related debt.

The question is when, not if

Every housing bubble comes to an end; it’s just a matter of when. According to CBC News, the Canadian central bank “has argued that the likelihood of household debt levels becoming a serious problem remains low and the situation is likely to improve once the economy starts to recover.”

That’s hard to believe, however, given that in the same report, it highlights numerous “potential hazards linked to high household debt—particularly if the country were hit by a severe recession or a prolonged period of increasing unemployment.”

As an investor, take a look at where your real estate exposure is. Many banks such as Bank of Montreal and Royal Bank of Canada (TSX:RY)(NYSE:RY) are overexposed to specific regions. Understanding where your risks are will be important no matter what the real estate market does.

Stock buy alert hits astounding 96% success rate!

The hand-picked investing team inside Stock Advisor Canada, recently issued a buy alert for one special type of "bread-and-butter" stock where The Motley Fool U.S. has banked profits on 23 out of 24 recommendations. Frankly, with an astounding 96% success rate that has delivered average returns of 260%, chances are this new pick could deliver life-changing returns as well. Because the team at Stock Advisor Canada fully embraces the same time-tested investing philosophies that have led to countless Motley Fool winners globally. So simply click here to unlock the full details behind this new recommendation and join Stock Advisor Canada.

*96% accuracy includes restaurant stock recommendations from Motley Fool U.S. services Stock AdvisorRule BreakersHidden GemsIncome Investor and Inside Value since each services inception. Returns as of 5/27/16.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

Fool contributor Ryan Vanzo has no position in any stocks mentioned.