Canada's Housing Bubble

Sep 30, 2010 Jay Bryan The Gazette

It's really puzzling at first glance. Consumers in the developed world's healthiest economy seem to be sunk in an increasingly deep funk.

The Consumer Confidence index based on a monthly nationwide survey carried out by the Conference Board of Canada has been dropping for most of this year.

It registered one more decline in September, extending its downtrend to eight months from a post-recession peak in January this year.

As this has happened, Canada's economy has done rather well. As of this summer, employment had regained all of the job losses this country suffered during the recession. Since the recession ended just over a year ago, consumer spending has been a big boost to the recovery.

Although we know that economic growth has been slowing from its supercharged pace early this year, we're still seeing growth, still enjoying modest employment gains. So why the gloom?

Few feel very sure, although there are lots of partial explanations.

Pedro Antunes, who oversees the consumer confidence survey, suggests that we might have gotten a little overoptimistic during 2009, when consumer confidence rose from an abysmal reading just above 50 to January's near-normal level just below 100.

During that period, Canada felt like a much better place than the U. S, with its crippled banking system, millions of job losses and skyrocketing number of housing foreclosures as that country's real-estate bubble deflated.

In Canada, banks were healthy and the job situation wasn't nearly as bad. As a result, people went on a homebuying spree when interest rates plunged, causing a housing boomlet that made sales and prices soar.

This and other consumer spending helped boost job creation, creating something of a virtuous circle and apparently persuading consumers that things were getting back to normal.

But that's not quite true, and this truth has been sinking in all year. While Canada remains in much better shape than the U.S., Japan or most European countries, that's not the same as normal.

The typical strong rebound that comes early in a recovery has settled down now, and most forecasters believe that what we face for the next year or two is a period of slower growth. That's not anything to panic over, but it's a little disappointing after the exhilarating rebound earlier this year.

Most consumers are not sophisticated enough to have worked out this forecast for themselves, but they are aware of the headlines, and the signs of slower growth have been all over the place for months.

There's been a drumbeat of bad news about U.S. unemployment and housing all year, frightening reports about this spring's European debt crisis and sensational headlines about a purported Canadian housing "bubble" that was about to burst.

Bad news from the U.S. worries Canadians who understand our major trade

links with that country, but probably also scares those who just pick up on the malaise from U.S. news media and don't distinguish the U.S. economy too carefully from Canada's.