”I should be very worried about Canada” -Paul Krugman

Well the monthly round-up is consuming a bit more time than expected.  I’m hoping to release the final numbers tomorrow instead.

However, I would like to quickly highlight a very brief blog entry by Nobel Prize winning economist Paul Krugman.  Though our economic and political ideologies vary markedly, the man can nonetheless see the writing on the wall when it comes to our current housing market and debt situation:

My take on the US economic crisis has increasingly been that banks were less central than many people think, while the housing bubble and household debt are the key players — which is why financial stabilization by itself wasn’t enough to produce a V-shaped recovery.

But if I take all that seriously, I should be very worried about Canada

Note that this second graph which appeared in the blog entry is almost a year and a half old.  We know that since then, our total consumer debt to income ratio has ballooned past 150%, eclipsing the US number and rapidly closing in on the UK…..two nations now in the midst of housing market corrections and weak organic growth among declining consumer spending.  Canada take note!

This is not the first time that Krugman has voiced concern for Canada.  In an August 2010 speech to the Canadian Bar Association, Krugman noted that, “Canada is by no means insulated.  Canadians borrow an awful lot. Savings rates have been very low. Household debt relative to income is very high here.” He also suggested that the Canadian housing bubble ”has yet to burst”.

Cheers,

Ben

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8 Responses to ”I should be very worried about Canada” -Paul Krugman

  1. jesse says:

    Pshaw. What does Paul Krugman know about bubbles anyways?

    Oh, THAT Paul Krugman. Well, we can’t say we weren’t warned.

  2. backwardsevolution says:

    Krugman’s take on the U.S. economic crisis was that “banks were less central than many people think”?

    And that’s why HE got the Nobel Prize – he’s really good at deflecting “heat” away from the banks, banks who lent to anything that breathed (to people who were often terrible risks) professionals who definitely knew better. Of course homeowners took on too much debt, but who allowed them to do this? The banks. Why? Bill Black calls it “control fraud”. I agree.

    Canada has allowed the same thing to happen here. I would never believe, even for a second, that no one saw this coming. It happened because they set it up to happen, made the rules (0%/40 year amortizations, 5%/35 year amortizations, cash back schemes) so it would go in one direction, reaped the profits, bonuses, fees. Almost an “if you build it, they will come” scenario, and surprise, surprise, they did!

    TV, radio, newspapers, realtors, bankers have been singing the praises of owning real estate. It takes a pretty strong individual to go against the message, especially if you are young and have had no direction otherwise. The Government of Canada should not have followed the States’ lead, holding rates too low for too long and increasing the amortization period.

    The people who set it up got rich; the people who got sucked in are about to get very poor.

    But no one saw it coming. Yeah, right.

  3. UnagiDon says:

    If one looks at the house-price indicator from 1987-2010, the results are:
    – Spain up 630%
    – Australia up 600%
    – Britain up 400%
    – US up ~210%
    – Canada up ~190%
    If one looks at the price-income ratio, the results are:
    – Canada up 240%
    – Spain up 200%
    – Britain up 150%
    – Australia up 120%
    – US down 85%

    So, what are the take-away messages? Perhaps
    – Canadian houses were already very expensive in 1987 so they didn’t increase as much as other nations? (This strikes me as unlikely.)
    – Canadian incomes are extremely stagnant compared to other nations?
    – Canadian houses are cheap for the international investor, but expensive for those earning income within Canada?

    • Just an FYI….the Economist chart uses the New House Price Index, which adjusts for size and quality of homes. What it does not catch is the change in consumer perceptions of ‘normal’. Though the average house size is increasing and people are stretching further to afford it, the true increase in house prices are not captured.

  4. Declan says:

    UnagiDon – The last Canadian bubble popped in 1989, so part of it is that prices were already high in 1987, particularly in Toronto/Montreal.

    Also, part of it may be lower inflation in Canada over that time (the percentage increases you refer to are nominal increases, not real).

    Also, Canadian incomes haven’t increased much over that time period because a lot of income growth was redirected into repairing government finances (and to corporate profits).

    But most importantly, note that the Economist uses Statistics Canada data (table: CANSIM 327-0005) as the house price index for Canada, but this is not really a true housing index, more of a survey of suburban tract builders (For example, according to that data series, prices in Vancouver are almost the same – in nominal terms – now, as they were in 1994).

    If you click the Economist chart over to real prices or prince/income ratios, you’ll see that they are suggesting that Canadian housing prices are lower now (in real terms) than they were in 1989, and that the price / income ratio has been steadily falling since 2002 – does that seem plausible to you?

    If you look at the Royal Lepage data instead, you can see some more reasonable numbers.

  5. TEST COMMENT FOR GRAVATAR

  6. Dan Coll says:

    Fairly predictable trend. Canada’s affluence came from a vibrant consumer society, cost of goods, (particularly after the implementation of free trade) was low and wages significantly higher than elsewhere in the world. Huge tracks of the population at all levels had substantial disposable income fuelling a robust self sustaining economy. Today — wages are lower than those of the other major economies except the US, while the tax burden on wage earners has virtually eliminated disposable income after the necessities are paid. As such, the ‘fuel’ in our economy is low grade and sputtering leaving an economy without the necessary critical mass of customers. We forestall the inevitable as Canadians use house equity funds on which to live and the backbone of our GDP is increasingly foreign owned exploitation of raw, unprocessed resources; removed with minimal royalties, virtually tax free and profits that hitherto would have been invested in new Canadian opportunities are now taken offshore. That is not to attack foreign investment, however there is a difference between investors who participate in the total spectrum of the society which provides their revenue, and marauders. Seems to me we have too many of one kind. We also have a neverending recurrence of groundhog hammering governments who have little vision beyond the next election; no plan, no long term strategy, no concept of a real Canadian identity in the world community. Can you really have much of a housing or debt bubble in a workcamp? Face it folks we will go out with a squeek and nobody will much notice.

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