Canada's Housing Bubble

Sep 17, 2010 Paul Vieira Financial Post

Ottawa -- When the parliamentary session resumes on Monday, Finance Minister Jim Flaherty will feel very much like the master in Oliver Twist, with political opponents, provinces and interest groups coming with their bowls and pleading, “Please sir, I want some more.”

The more, of course, being stimulus, which is set to run out on March 31 of next year. Calls for more government spending grow louder by the day on the fear of a slowing global economy and relatively high unemployment rate. If the Obama White House is contemplating more stimuli, NDP leader Jack Layton said Thursday, so should Ottawa.

Meanwhile, Liberals say the Conservatives should keep the funds flowing past the March 31 deadline to ensure projects already underway get the needed cash even if they aren’t completed by deadline. Otherwise, they add, municipal taxpayers will get stuck with a surprise bill in the millions once the stimulus taps are closed.

To date, Mr. Flaherty and his government have resisted such calls, warning government should not be an “engine” of economic growth. Whether this hard line stands up to fierce pressure this fall in the House of Commons depends on the political environment — especially in vote-sensitive regions — and how the global economy unfolds.

“There is a lot of economic uncertainty about the outlook for the U.S. and Europe,” said Finn Poschmann, vice-president of research for the C.D. Howe Institute, a Toronto-based think-tank. Still, “the economic case for continued stimulus spending in Canada is pretty weak because we are referring to spending intended to address a recession” that ended in mid-2009.

Canadian economic activity has returned to pre-recession levels, and the latest labour market data indicate jobs lost during the downturn have been recouped at a faster pace than usual.

But Canada is beginning to feel the pinch of a tepid U.S. economy. Growth slowed to 2% annualized in the second quarter, from 5%-plus levels in previous quarters, and in a new forecast Toronto-Dominion Bank suggests Canadian output is set to expand by just 2% in 2011.

Besides a weaker U.S. economy, TD said other headwinds include a downswing in Canadian housing, partly due to measures Mr. Flaherty introduced this year that make it tougher to qualify for mortgage insurance; an increasingly indebted Canadian consumer; and the winding down of government stimulus and interest rate hikes.

Derek Burleton, TD’s deputy chief economist, said one advantage in Ottawa’s favour is that its fiscal house is in relatively decent shape and thus won’t require “radical” fiscal austerity.

Still, Mr. Burleton said budget cutting should continue as planned.

“There needs to be a recognition that we still face a deficit problem … and if anything, from a longer-term perspective, those fiscal challenges are going to intensify,” he said, citing a slower-growth profile and the aging population.

In its last budget, the federal government laid out measures that would allow Canada to return to balanced budget by mid-decade, through a combination of cuts to the public service, limits on defence spending and higher EI premiums. The fall fiscal update, to be tabled in the coming months, may provide more detail on the government’s outlook, and how deep the spending cuts in the public service will be. This week, the government asked its key unions to negotiate wages before contracts expire to help manage “financial predictability.”

John Baird, the government House Leader, said Thursday his government’s focus on returning to budget balance would not waver and a second round of stimulus is not in the cards.

Yet, in the same breath, Mr. Baird signalled the Conservatives won’t sit idly by as the recovery slows. He said the government would unveil at least three new measures in the coming “week or two” aimed at fostering growth and job creation, without elaborating.

Financial Post

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