Global housing markets paint ominous portrait for Canada

Robert Shiller, Yale University professor of economics and co-founder of the Case-Shiller index, told CNBC, “Home prices are very different from stock prices, they show a lot of momentum and once things start down they can go down for five years or ten years so I think it is a dismal time for the Spanish housing market.” Here is today’s money quote from Bob: “You know people are not as smart as they seem.” “Here is the direct link.

As we listen to this discussion, we should keep in mind that Canada’s housing market has continued to climb the past few years as most of the world has suffered through the down side of their housing bust.

Canada’s economy came through the 2001-02 global recession better than most because the commodities boom was just getting started with a jump-start from Greenspan’s rate suppression following the tech wreck. This came at a time when the commodities sector had been out of favor and under-invested for 2 decades. Canada benefited from the new commodities demand boom. The inflating global realty bubble continued to fuel the Canadian economy as a major commodity exporter. And this brought a fresh frenzy of over-investment and speculation in the commodities sector. Then came the crash of 2008.

This time Canada came through better than others because the Canadian consumer was enticed by loose credit and government (CMHC) policies prompting them to literally eat themselves on increasing credit and even more over-investment and speculation into richly valued realty markets. More loose money from global central bankers spurred a resumption in commodities demand and speculation. Commodity-centric Alberta and Saskatchewan were the lone bright spots of Canada’s export recovery the past 3 years. And now the world is entering its next cyclical downturn.

Today we learn Canada’s GDP contracted by 0.2 percent in February, reversing the growth seen in the previous two months. The Canadian economy had grown by 0.1 percent in January and 0.5 percent in December after shrinking by 0.1 percent in November. Economists surveyed by Bloomberg News had expected Canada’s Gross Domestic Product (GDP) to expand by 2.1%. The month-on-month print also fell short of expectations, with the consensus forecast of economists calling for growth of 0.2 percent.

According to a report released by Statistics Canada, the slowdown in economic growth was led by decreases in mining and oil and gas extraction, manufacturing and utilities, which outpaced advances in construction and wholesale trade. See:  Loonie tumbles as Canadian economy shrinks in February

Today Canadian consumers are the weakest they have been in decades with little savings, tons of debt and nearly all of their retirement chips on hopes for continued gains in housing prices. With the domestic cupboards now bare, one has to be concerned that Canada has a greater chance of following other countries into recession this downturn.

For stock investors it should also be noted that even though Canada did not officially recess in 2001 and came out faster than other economies in 2009, the Canadian stock market still lost more than 50% of its value in both of these downturns. Mining and commodity shares lost far more.   We have to ask ourselves:  what should Canada be prepared for this time?