December 3, 2013

Blame Canada: It’s Our Turn to Pop!

From the Washington Post:

Nouriel Roubini was one of the most presciently pessimistic analysts of the global economy in the run-up to the global financial crisis. And now he thinks it’s happening again.

… Roubini sees housing prices getting out of whack in quite a few small and mid-sized nations that are well-governed and managed to avoid the worst economic effects of the financial crisis: Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand  and the London metropolitan area in the U.K. …

It seems notable that the bubble markets of the last cycle don’t fit this story. It’s mostly the countries that managed to avoid price runups last time that are experiencing it now. Here, for example, is the price of new homes in Canada over the past decade:



Prices in Canada have been moving up in a more or less straight continuous line, pausing only briefly during the worst days of the financial crisis, whereas the U.S. prices experienced a devastating boom and bust. U.S. home prices are still far below their 2006 peak (and even further below when adjusted for inflation), whereas Canadian prices are reaching new highs. …

All the more worrisome, if you are a policymaker or just somebody who doesn’t want to see the world economy blow up (again), is that the continued rising prices are being accompanied by rising consumer debt in many of these countries. Here, for example, is Canada’s household debt to GDP ratio:



As it shows, Canadians are taking on ever higher debts relative to the size of their economy, a phenomenon driven heavily by mortgage borrowing. They are thus leaving themselves unusually vulnerable if interest rates rise or housing prices fall. By contrast, in the United States, after running up enormous household debts before the crisis, the level has been falling steadily relative to the size of the U.S. economy since then.



Perhaps scariest of all, if Roubini is right, is that if these are bubbles that eventually pop, policymakers will not have the tools they had in 2008 to cushion the blow. The world’s central banks, in particular, don’t have much (arguably any) room to lower interest rates further. Which means that if these regulatory tools aren’t up to the job, when the next global financial crisis comes, we can all take a lesson from the creators of “South Park.” It will be time to Blame Canada.

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  1. I’ll take the other side of this wager for 2014. Bottle of whiskey Gord?

    We will face a decline in house prices and consumers/ HH’s will be negatively impacted at SOME POINT in the future. The question is when? What causes the decline? It’s great that Mr. Roubini points out that HH’s are vulnerable on an ‘average’ basis because of high debt load and I would agree – they are vulnerable on an average basis. But how leveraged is the average mortgage relative to the value of the asset? What recourse is available on the loan/ mortgage? What is the average HH equity in their home? What is the HH’s ability to weather an interruption in income/ decline in income? In my mind, these are the more important questions in gauging the severity of a future financial crisis.

    The impetus for this ‘correction’ will most likely be an externally driven event (ie. hard landing in China, another recession in Europe) at an international level or BoC driven with rapid increases in prime at a national level or a fundamental imbalance of supply/ demand (ie. Toronto concrete condominium product) at a more local/ regional level (NB. Ottawa looks shaky, so does Montreal re. supply/ demand imbalances). Anyway…. So much more to say….

    1. “So much more to say….”

      Go on… I’m interested. You raised a lot of questions and I’d like to hear some answers 🙂

    1. The point being made is about the rate of change, not the absolute value.

      They could re-plot these graphs to show the derivative with respect to time, and you’d see spikes even if the vertical axis had an origin at zero.

      Alternatively, they could be plotted normalized to the value at the point when the drastic changes started happening. The effect would be similar.

      Graphs are like any other tool of communication (e.g., tables of numbers, written language). They are meant to be used to communicate an idea. In this case, I think the graphs adequately illustrate the point being made. That is, some economies (like Canada) didn’t go through the same downturn in house prices after the 2008 crash that other economies (like USA) did. As a result, Canadian stats are now looking similar to what the USA’s looked like before the crash.

      Now, whether you think the underlying message/analysis is valid is another story.

      1. My whole point is that the rate of change is less than is implied by the graphs. And in fact the post-recession rate is less than before.

        I’m not qualified to make predictions, I’m just pointing out that people judging the numbers should be aware of how they’re being presented.