Canada's Housing Bubble

Harper hints at rule changes

An interview with Stephen Harper aired on Christmas day on CTV.  The PM discussed a number of topics including the economy, Afghanistan, and US relations.  While discussing the current state of the economy and upcoming budgets, Harper had this to say:

“It’s not a matter of dramatic, draconian cuts but it will be a matter of discipline over some period of time.” He hinted the government is prepared to change mortgage rules to reverse a trend in which Canadians are going deeper into debt. “We’ve tightened mortgage rules before. If we have to do that again, we will.”

A not-so-subtle warning perhaps?  Not everyone thinks the rule changes will materialize:

“I don’t think it’s a foregone conclusion that they do anything,” said Doug Porter, deputy chief economist at BMO Nesbitt Burns Inc. in Toronto.”

“For basically the last year people have been encouraged left, right and centre to lock in for longer, and the new mortgage insurance rules are basically aimed at making sure people could handle a five-year rate,” Mr. Porter said, referring to Mr. Flaherty’s last move to curb borrowing, which included boosting the qualifying rate for floating-rate mortgages earlier this year”

We’ll find out soon enough.  I could see a token ‘tightening’ of some peripheral lending requirement in the next budget with either an increase in down payment or a lowering of maximum amortization when/if the conservatives secure a majority.

Economic headwinds keep making the news

The economic headwinds that have been discussed on this blog many times are now increasingly gaining media attention.  Back when the media and most economists were commending Canada for its strong economic recovery coming out of the recession, I was warning of storm clouds on the horizon while writing guest posts over at my brother’s blog.  With Canada’s Q3 GDP coming in at an abysmal 1% annualized, all of a sudden people are seeing things differently.

Canada’s economic albatrosses

“A strong loonie, over-reliance on the U.S. and high consumer debt will continue to drag on the economy in 2011, with the outlook for the next few years sluggish unless Canada switches its focus to emerging markets, economists say.”

“…However, economists are concerned that sooner or later consumers will tighten their purse strings to reduce household debt, which is running at a record of 148% of income.”

“…Another major risk for the economy in 2011 may come from Europe. The Bank of Canada in its December financial review said the risks associated with the euro zone’s sovereign debt crisis are high and rising.”

If you’ve read my economic forecast you’ll know that I fully expect decreasing exports, consumer spending, and house prices to be a significant drag on economic growth, though I think the impact will be greater than most economists currently anticipate.  I think economic growth in the 2.7% range over the next few years as is being forecast by most economists is on the high side.  I see a recession coming with negative quarterly growth likely later in 2011, possibly by Q2 or Q3.

Post of the year?

Earlier today, Mish wrote an entry using data from the Contrary Investor Report which examines the relationship between consumer consumption, savings rate, and economic growth over time.

Central bank policies the world over have been geared at reigniting the consumer spending engine.  Here in Canada, the portion of our GDP that comes from consumer spending has risen from its long-term average by nearly 10 percentage points to sit at over 65% today.  When the economy cratered back in 2008-2009, the obvious solution was to slash interest rates to get consumers back in the borrow-and-spend mindset.  It worked brilliantly at goosing GDP over the short term.  But can sustainable economic expansion be ushered in by an era of ever-expanding consumer debt and falling savings?

Check out Mish’s post for some insight into that question.  The three graphs are particularly interesting.

Cheers,

Ben