Canada's Housing Bubble

Paul Krugman

Paul Krugman

Aug 18, 2010 Michael Babad Globe and Mail

'Canadians borrow and spend like, well, Americans,' noted economist finds before trip to Niagara Falls

What Paul Krugman learned about Canada

Paul Krugman has learned some things about Canada. The noted economist and Nobel laureate did some homework in preparation for a weekend talk to the Canadian Bar Association in Niagara Falls, Ont., and "to be honest, I came away a little less sanguine about Canada than I started," he writes.

In an entry titled Uh-Oh Canada? in his New York Times blog, he says he still believes in the Canadian banking system but he cites "some worrying signs" in other areas.

"First of all, Canadians borrow and spend like, well, Americans," he says, using a Bank of Canada chart on the rising housing debt-to-income ratio to illustrate his point. (He might have found the same thing by watching the traffic at some of the major centres on the American side of the border when the loonie shot up, but he's likely not into outlet malls.)

"And while they managed to avoid getting caught up in the big, synchronized North Atlantic housing bubble, trends since are not completely reassuring," he adds, using a chart of real house prices. "I’m not making any predictions here, just noting that if we go beyond banking to ask about household balance sheets and risks thereto, things up north bear watching."

Noting today that the comments raised eyebrows in Canada, Scotia Capital economists Derek Holt and Gorica Djeric said the economist is "mostly right." But there are notable differences that make "simple commentaries a touch dangerous," they add.

"Strategic defaults don't exist as an option outside of Alberta and Saskatchewan, owing to post Great Depression prairie populism against the eastern banks - a policy that cost Calgarians deeply when they walked away in the early 1980s. Refinancing is tougher in Canada such that the one-way gravy train ridden by excessively leveraged U.S. borrowers isn’t quite as easy to ride in Canada. Canadians didn't borrow through foolish products like Ninja (no income, no job, no assests) mortgages. Outside of leverage on the household balance sheet, leverage elsewhere in the Canadian system is not at all comparable to what it was in the U.S. ... Further, unlike the U.S., any mortgage with less than 25 per cent down is required by law to have mortgage insurance and that insurance is directly guaranteed by the state. Mortgage interest deductibility also doesn’t exist in Canada, except for an array of sometimes real and sometimes not-so-real small businesses."

But, they said in a research note, "Krugman's view is on the mark in warning of complacency in a very low rate environment. The Canada advantage isn't immutable as a permanent attribute to the country's economic and financial landscape."

• Read his blog entry
• Krugman warns Canada not immune