Canada's Housing Bubble

Sep 14, 2010 John Morrissy Financial Post

Canada’s consumer-led economic recovery is quickly fading, as workers living paycheque to paycheque struggle with stubbornly high debt levels.

Reports Monday offered a sombre glimpse into how diminished consumer spending could dent housing prices and overall growth into 2011.

Largely, it boils down to the real estate market and the debt Canadians acquired in a flurry of home buying that helped the country weather the economic downturn.

Yesterday’s saviour is today’s nemesis, the Organization for Economic Co-operation and Development cautioned in a report on Canada’s economy.

“Most of the increase in household credit has been in mortgage debt, helping to bring about a strong revival in housing-market activity after a brief dip at the beginning of the crisis,” said the report from the Paris-based think-tank, which represents the world’s richest countries.

But, it added, “high household indebtedness also implies a growing vulnerability to any future adverse shocks.”

TDEconomics now forecasts that Canadian housing prices, already off 3.7% this year, will fall another 8% by mid-2011, said economist Diana Petramala. As well, she said, growth in the economy will crawl along for the remainder of 2010 with growth of less than 2% annualized, edging up to only 2% in 2011.

It will be the victim of weak growth in consumer spending, which will be nearly halved in the face of those mounting debts, remaining in a range of 2% to 2.5% over the next year, well below the 3.5% to 4% growth registered over the last five years.

“This time around,” Ms. Petramala said, “the consumer won’t be the significant driver to pull the economy through.”

Meanwhile, Statistics Canada issued a report Monday showing the balance sheet of the average Canadian household worsened in the second quarter.

Household net worth — wealth minus liabilities — fell 0.6%, or by $34-billion, to $5.9-trillion in the second quarter, as the value of stock market holdings fell, and liabilities, particularly mortgages, rose.

It was the first time since the recession that household net worth fell.

“Weak asset growth in combination with still strong liability growth will likely have households feeling buried under more debt than they ever have,” said Ms. Petramala.

It’s little wonder, considering that almost six out of every 10 Canadians say they would be in financial difficulty if their paycheque was delayed, even by one week, according to a report Monday from the Canadian Payroll Association.

The report also cautioned that Canadians feel worse about their economic situation than they did one year ago, in the midst of the recession.

Perhaps most telling is the 81% response rate in the payroll survey to the question, what would you do if you won $1-million in the lottery. The answer: “Pay down debt.”

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