Over the past few months, we have been trying to politely point out that the rebounding Canadian housing bubble of the past year has been the main prop behind Canada's 'miraculous” economic recovery to date. Canadian GDP (we have argued) has bounced back mainly because Canadians have been naively prompted by lax lending standards and 75-year interest rate lows to take on historic and still ballooning levels of consumer debt.
We have not been surprised that our politicians have missed the nexus completely on this. Over the past several years the Canadian government has held a near perfect record of missing key turns in our economy. We have grown to expect this. But we have been just a little frustrated that most economic commentators have missed this reality completely as well. Remember 2007 and all the “decoupling” rhetoric about Canada not following the US into recession? Well this past year, decoupling chants have resumed with hopes that Canada can have a strong and sustainable recovery without the US (our largest customer), and that housing bubbles and horrendous consumer debt burdens won't end badly here as they have done in the rest of the world. But here is the thing: the chances of us escaping the basic laws of financial gravity in Canada are about precisely nil.
Today we were encouraged to see (now Canadian) Economist David Rosenberg's morning notes focus on precisely these issues:
We did a bottom-up accounting from the GDP data to see just how much of the post-recession recovery in Canada has been due to the direct and indirect effects from the housing boom. Part of that indirect impact comes via the “wealth effect” on consumer spending from the 20% YoY surge in home values seeing as housing comprises nearly one-quarter of the asset base in the household sector. In Canada, this means that every dollar increase in housing wealth translates into 7-9 cents of incremental spending in the GDP accounts. Housing has tremendous spin-off effects outside of the “wealth effect” — the impact on building materials, real estate income, legal services, architecture billing, classified ads, infrastructure, etc — and it’s all locally-driven (ie, marginal import leakage).
Based on our statistical work, around half of the 7% annualized growth rate in nominal GDP from the recession trough has been due to the combined direct and indirect benefits from the housing boom. And, when we apply the price deflators to the various sectors of GDP, we actually find that every penny of economic activity, in real terms since this recovery began, has occurred thanks to the housing sector. In other words, if not for housing real GDP would have stagnated since Q2 2009 instead of rebounding at a 3% annualized pace
See the whole story: Coffee with Dave: Canadian Housing Market
Why is this not a good thing? Because Canadians today are under-saved, over-levered, over-housed, under-employed, and about to enter a likely multi-year era of rising interest rates. Our consumers, at the all important margin, are literally spent. The 20% surge back to parity for our dollar in the past year really couldn’t come at a worse time for export-needy Canada. When our housing demand finally softens in the months ahead it appears likely to take the Canadian recovery “miracle” down with it.