Good article in MacLeans this week offers some useful perspective on the downturn now begun in the Canadian realty market and how this is likely to reverberate through the highly-levered domestic economy. Real estate cycles typically last 10-12 years, and Canada has been in an extended uptrend since 2001. Over this period debt-binging Canadians have bid up home prices so high that even at the lowest mortgage rates in 100 years, families are still having to spend 40 to 80% of their monthly income just to keep the roof over their head. This leaves very little margin for things like peace of mind, economic downturns, under-employment, illness or other cost of living increases. And then there is the more than half a trillion dollars in low equity, CMHC-backed loans now also hanging over Canadian taxpayers.
“When the financial crisis hit, Ottawa responded by buying up $69-billion worth of bank-owned mortgages, encouraging financial institutions to keep lending. After a brief dip, the housing sector bounced back and carried the economy on its shoulders. But today consumers are tapped out just as a new round of macro-threats has emerged. It’s widely believed that the U.S.—and, hence, Canada—could face another recession unless Republicans and Democrats in Washington are able to agree on a comprehensive deficit-fighting plan. Even if the so-called fiscal cliff (a combination of tax increases and planned spending cuts) is avoided, the U.S. government’s longer-term debt troubles could stalk the economy for years to come. At the same time, the European debt crisis and China’s faltering growth have created a gloomy global outlook, threatening Canada’s large, export-oriented resource sector. With demand for oil falling and increased output from the Bakken shale formation in North Dakota depressing prices, some Canadian energy companies have already cut back on spending, threatening another key economic driver. Suncor, for one, recently said it would review expansion of three major oil sands projects. Talisman Energy is also forecasting spending cuts of as much as 25 per cent next year. The drag is being reflected in GDP. Reduced global demand for oil and gas and manufacturing dragged down the third quarter’s anemic 0.6 per cent growth, as did reduced business investment and a drop in exports, according to Statistics Canada.
Bay Street is getting nervous…”
Read the whole article for some important perspective on how the great Canadian debt bubble is now a headwind for the great white north. See: Great Canadian real estate crash