Canada's Housing Bubble

Jun 20,  2011 Ottawa Citizen

Bank of Canada governor Mark Carney finds himself in a very difficult position. Carney is worried about the amount of debt Canadians are carrying, particularly when it comes to their houses.

We spend way too much of our productive capital on housing. But he's also worried about keeping the economy afloat as it pulls out of a gripping recession. And Carney has to be concerned about a U.S. economy that is still trying to free itself from a recession, much of which was caused by a collapse in a housing bubble from which that market has yet to extricate itself.

Canada didn't have its housing bubble popped, but many experts are worried that it could happen. Carney is stuck in a bad place. He can't raise interest rates because if he does, the dollar will rise and Canada, an exporting nation, won't be able to sell its exports. In particular, rising interest rates and a strong loonie could crater the already-troubled Ontario manufacturing sector.

So Carney should keep interest rates low, right? Except that Canadian private debt is rising to extraordinary levels -about $1.5 trillion to be exact -which could cause problems for consumer spending. In fact if interest levels rise, will Canadians be able to cover the astounding amount of debt they have accrued, particularly in housing? And if they can't, real estate loans now make up about 40 per cent of bank assets. That's a lot of exposure when one considers that a decade ago, it was 30 per cent. With a rise in interest rates, what kind of pressure will that exposure put on reputed-tobe-sturdy Canadian banks?

Meanwhile, the amount of money Canadians spend on housing is astounding. In Vancouver for example, the average house price is $831,555, a year-over-year increase of just less than 26 per cent. That's a burden of a lifetime for a typical Canadian family. In fact for many, more than they can possibly pay for over time. Meanwhile Ottawa looks like a poor country cousin with an average price of $353,046, up 5.6 per cent over last year.

Those kinds of mortgages act like an anchor on families and the economy. They don't allow unfettered mobility of labour. And some workers simply can't move to expensive housing cities. Big mortgages are beneficial if one is in the building industry or spinoff sectors such as appliances or furniture. But one wonders how much of that money, with lower housing prices, could be used for education or research or myriad other pursuits were it not being poured into dwellings.

You don't want Carney's problems right now. If he raises rates, he takes a chance on collapsing the economy. If he holds them where they are, Carney risks encouraging Canadians to burden themselves with even more debt -another threat to the economy.

Carney doesn't look as though he has anywhere to hide.