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As regular readers will know, I am a close follower of the Canadian economy and housing market.

Like Australia, Canada is a commodity exporter and more or less dodged the global recession that recently shocked the developed world. As in Australia, there is also widespread debate about whether Canada is experiencing a speculative housing bubble or asset inflation based upon sound fundamentals.

So when a new research reports is released on the Canadian economy and/or housing market, I read it with interest as, more often than not, it provides a useful point of comparison to Australia.

Last week, Canada’s weekly current affairs magazine, Macleans.ca, published an article entitled The Canada bubble, which questioned the underlying strength of the Canadian economy and the risks posed by a slowdown in the Chinese economy. Whilst reading this article, I was amazed at the parallels with Australia. In fact, I would even go as far as saying that you could replace the word “Canada” with “Australia” and the article would be equally as poignant.

Below are the key extracts from the Macleans.ca article, with key sections highlighted in bold. I have also added some charts for extra context.

There’s arguably never been a time when forecasters have been so divided in their views of Canada’s economy. That’s partly due to the seemingly Herculean way we shrugged off the global recession while almost every other developed nation tanked and continues to struggle—a feat that can’t help but arouse a bit of too-good-to-be-true anxiety….

The division of opinion has to do mostly with the two particular engines that have driven our success—resources and real estate. Both are cyclical. Prices rise and fall as supply and demand shift. Only that’s no longer seen to be the case in Canada. Never mind that some experts now say the surge in commodities exceeds anything we’ve seen in two centuries, or that by many measures the housing market sits at multi-decade highs. Those who see good times ahead are convinced the phenomenal gains reflect a fundamental shift in the global economy. In short, it requires one to ascribe to the four most dangerous words in the world of investing: this time it’s different.

As it is, the love-in for all things Canadian is in full swing…. Canada is the toast of international think tanks and world leaders. They praise our sound financial system, which seemingly avoided the traps that engulfed other nations’ banks. Conservative legislators in America and Britain sing the virtues of our relatively sound government finances. Like a cherry on top, the Economist magazine once again just selected Vancouver as the world’s most livable city, with Toronto and Calgary also making it into the top five.

Investors, both domestic and foreign, simply can’t get enough of Canada. In 2010, non-residents poured $116 billion into Canadian investments, the highest level ever… Eleven years into the bull market in commodities, it’s easy to forget just how much Canada has riding on strong resource prices. For one thing, the boom has boosted our paycheques. The rise in commodity prices was responsible for two-thirds of the 15 per cent gain in disposable income experienced in the last decade, Bank of Canada governor Mark Carney said in a 2008 speech. While Canada’s soaring loonie has hurt manufacturers, it’s also improved living standards by keeping inflation low. And rising commodity prices have also helped keep unemployment muted. As bad as Canadians think the recent recession was, in terms of the job market it was the mildest downturn of the last 30 years. In January, the Canadian economy added nearly double the number of jobs created in the entire U.S. economy, which is 10 times larger.

Note that although Canada has undoubtedly benefited from rising commodity prices, it pales in comparison to the terms-of-trade boost received by Australia (see below IMF chart).

All of those benefits have fed directly into Canada’s apparently Teflon housing market. When the Great Recession hit, prices dipped briefly, but quickly rebounded as home­buyers borrowed heavily to get into the market. In fact, relative to incomes, house prices in Canada are now nearly as overvalued as they were in the U.S. at the peak of that country’s housing bubble…

As with soaring commodity prices, the strong housing sector has contributed in a big way to the country’s boom-time mentality and sense of invincibility. It’s been a crucial driver for labour markets… As house prices climbed, households have been more inclined to go shopping.

But the housing boom has also gone hand in hand with Canada’s household debt boom. Over the last decade, Canadians have doubled their consumer and mortgage debt loads, to more than $1.5 trillion. For every dollar of disposable income households earn, they now carry $1.50 of debt, a level higher than in the U.S. [but still lower than Australia]. That’s a worrying stress point that could undo the high-flying Canadian economy if it hits turbulence—in exactly the same way heavy debt loads left American households exposed. “Canada’s success story is uncomfortably similar to the U.S. success story,” says Robert Shiller, a professor at Yale University who accurately predicted the real estate crash in the U.S. “It might be offensive to Canadians, but we’re like two peas in a pod.”

What’s different is that the U.S. didn’t have the resource sector to fall back on. But how secure should we be in assuming the commodity boom won’t turn into a bust? Not very, says Shawn Hackett, a commodity analyst in Florida who has dug into the sector’s long history of booms and busts. He analyzed the 10-year average annual rates of return for commodity prices dating back to the early 1800s. At no time have prices risen as fast and as high as they have over the last decade without being followed by a sharp decline. “If history is any guide, we’re higher than the 1980 top and much higher than the 1950 top,” he says. “Unless we are going to do something right now that defies 200 years of the way the rules of engagement have been in commodities, we’re due for a nasty spill.”

Below is the chart that Mr Hackett refers to, which has been taken from another recent Macleans.ca article:

What has always happened in the past, and what Hackett expects to see again, is that as prices rise, consumers cut back while producers ramp up supply. The end result is a supply glut that drives prices back down.

Just as we’ve come to rely on rising commodity prices for our prosperity, a resource sector bear market would hit Canada particularly hard. For one thing, it could strip Canada of the cherished view we’re more prudent than other countries. After all, Ottawa and the provinces vigorously drove up spending even before the stimulus measures of 2009 were announced. It’s just that revenues, from royalty payments and corporate and income taxes, rose faster…

Investors would be hit hard, too… If commodity prices tank, the energy and mining companies that powered [stock market] returns over the last decade could act like an anchor on investor portfolios.

But it’s Canada’s housing market, and those who have overextended themselves with massive mortgages, that stand to lose the most. The housing sector has become inextricably tied to the broader story of Canada’s elevated standing in the world. It’s a powerful and psychological link, says Shiller, who explored how bubbles form in his book Irrational Exuberance. “Bubbles are mediated by price increases and new-era stories,” he says. Any time you hear talk of a new era—such as Canada becoming the envy of the world, or that soaring commodity prices are here to stay—and it’s used to justify rising prices, it’s a good sign you’re in bubble territory. If a commodity bust does occur, one of the key foundations of the housing bubble would crumble along with it…

Perhaps there’s another reason to be anxious. Lately the term “Northern Tiger” has been used a lot to describe the Canadian economy. Given what happened to that other once-booming, now devastated “tiger,” the Celtic one in Ireland, it’s best not to get too used to it.

Although Australia and Canada are half a world apart, our economies seem to share an uncanny resemblance. In fact, reading this article is like looking in the mirror.

It’s just a shame that Australia’s mainstream media (MSM) refuses to run similar articles highlighting the risks posed to the Australian economy and housing market from a slowdown of the Chinese economy. If Canada’s MSM can do it, why can’t ours?

Thank goodness for the internet. Otherwise we’d all be in the dark.

Cheers Leith

[email protected]


Unconventional Economist


  1. Perfect parallel…nice find Leith.

    When you suspect a bubble may exist….a bubble it is…it will not take a fall in commodity demand or prices…just time. Virtually no one is servicing or paying down principle on real estate…only interest. If you purchased after the Sydney Olympics in Australia…sell, rent and hold cash…for 5-7 years and you will be glad you did.

    Trust me…



  2. I read somewhere that one difference between Australia and Canada housing boom is that Australia’s even extends to small country towns whereas Canada’s is mostly confined to major cities. Can’t say for Canada but I had a quick look at house prices in far north QLD yeterday and can confirm that house prices in even remote communities average over 300k. I would assume insurance is prohibitively expensive, especially post Yasi. I noticed the similarities between Australia and Canada economies a while ago and found this amusing website that I check out occasionally.


  3. While I’m certainly sympathetic to the general point you’re making, some of the statements in the article seem at odds with the commodity price chart you show. The article says –

    ‘At no time have prices risen as fast and as high as they have over the last decade without being followed by a sharp decline. “If history is any guide, we’re higher than the 1980 top and much higher than the 1950 top”… What has always happened in the past, and what Hackett expects to see again, is that as prices rise, consumers cut back while producers ramp up supply. The end result is a supply glut that drives prices back down.’

    Yet the chart shows that the rate of change of prices has never fallen below zero since WWII. Your broader point about the dangers of a commodity bubble to the Canadian (Australian) economy may still be valid, but as far as I can see the assertion in the article that prices have shown a “sharp decline” after every boom just isn’t supported by the particular set of data you cite.

    • I think you’re picking nits. It’s dropped very close to 0%. A fall from 10% growth to 1% is pretty substantial; furthermore, the graph does bear out the idea that the more steep or rapid the increase, the more steep, rapid and further the fall. In a word, the graph illustrates clearly the points made about the cycle.

  4. Up until recently there had been no bearish articles whatsoever in the MSM, even though they are still few and far between.

    As long as they keep the stupid bogan masses convinced that you cannot lose with bricks in mortar I assume they think they can keep the sucker inflated.

    I was at a BBQ on the weekend, the bogan brother-in-law could not be swayed from his view that housing will not go down! What was the point of arguing with an idiot I thought.

    This sucker is coming down one way or another. Knowledge is power 🙂

    • Bricks and mortar? Make that timber, nails and fibro…

      Seems to me everyone is saving on materials in order to keep prices at least somewhat down.

  5. I don’t know what we’re all worried about – Jessica Irvine has stepped in for Gittins today and told us that there’s nothing to worry about. The MSM sound a bit like Neville Bartos with his line about cash in the movie Chopper.

    Neville: There’s no bubble here. Here there’s no bubble, alright? Bubble *no*, Robbo?
    Robbo: No bubble.

    • I lol’d.

      In other chopper-esque references.

      Jessica Irvine’s mouth tastes like spruiker’s c%^k.

  6. Yeah Christan,Just aword in private..
    “Hey bud…that ‘BBQ’ you mentioned above ,was gas operated..wasn’t it, no ‘bubbles’ in the drinks..hm , I noticed your also doing a bit of bear-hunting, hey ,Tell me, you have ‘campfires’ right ..hmmm
    Ok just another, And I know that,
    ‘Bricks in Mortar’ thing might be a mistake , but I’m seeing ‘fire-places’ and ‘chimneys’ ..aren’t I…You getting the gist of this ..Don’t worry,
    I let you know ,I’m not fussed about ‘sucker’ just as long as it doesn’t ‘breath-out’,,But ‘Inflated’..like a doll , gives it away… what a laugh ..Anyway sorry to keep you, I’ll finish up and say “Knowledge is Power” ,just Understand it’s a two-way street.,friend.
    In summing up our little private chat,and in trying to say , and ,
    At this Rate ,Bud ,your going to get all the ‘Birds’ on side by weeks end …So just asking for ,the sake of the rest of us..and best ‘The’ ,leave the Ca word out of it next ,unless it’s Canada..” Thanks ..
    And I’d like to see you right again…

    Cheers JR

        • And just a follow up for you Chris
          check-out the latest ABC ‘do come up with the missing pieces’ “Clarke and Dawe” talk on ‘Carbon’…7:30 report..You’ll love it ..
          Bet I know what you’re thinking..’after

          Roger Roger

  7. “If Canada’s MSM can do it, why can’t ours?”

    We have Fairfax rags tethered to Domain and ADP and Murdoch rags so Bogan’s have something to spill their marmalade on each with a RE Saturday liftout larger than the King James Bible large print edition.

    Not exactly blessed with diversity in print media.

  8. A property bubble bursting right now will be painful, but not disastrous.

    The Chinese economy and the US economy is now out of synch, and Australia is increasingly mimicking the Chinese economy. The ‘doomsday’ scenario occur when the Chinese economy stalls, but the US economy is heating up. The collapsing commodity prices, a rise in unemployment, property defaults on top of the US interest rate being higher than the Australian interest rate will result in a free falling Aussie dollar and massive capital outflow. Then we will be really screwed.

    • In a perverse masochistic way – I can’t wait for the day of reckoning. Hopefully it will clean up all the profligate govt. spending and waste on BS.

  9. Re: Quote: “It’s just a shame that Australia’s mainstream media (MSM) refuses to run similar articles highlighting the risks posed to the Australian economy and housing market from a slowdown of the Chinese economy. If Canada’s MSM can do it, why can’t ours?”

    The difference is in education. Canucks are more informed about national and international policy, and actually discuss it out loud with friends and family regularly.

    Aussie’s have blinders on that only let them pay attention to news about footy celebs getting in bar fights or assaulting girls. Reality isn’t their forte.

  10. Excellent work Leith. This is one comparison that I can agree with. Australia’s housing situation and economy do appear to be similar to Canada’s. What annoys me is many shortage-deniers parroting the myth that we are the same as UK, USA, Ireland, Spain. Clearly we are not like those countries.

      • Well for one, here in Sydney we have extremely high rents which are a very good indication of a shortage. There is no evidence that the other countries had a high rent:income ratio either before or after their price boom and bust.

  11. The economy of any nation has gone from one side of the pendulum to the other and back. This has been going on for centuries and thousands of years.

    It’s just that we know more about it today than ever before because of the almost instantaneous information we can get anytime anywhere.

    The basic thing is this: economy looks good when you as an individual are doing good. When you have a good job with nice pay, live in a home that’s worth something, can buy food and clothing.

    As a matter of fact, recession can be a blessing in disguise for so many well-to do folks. You don’t give a damn how others cope with the hardship.

    If a nation’s general populace have good and decent jobs and they know hopefully what they have today will stay with them tomorrow, no one gives a damn how other nations are doing.

    Graphs and data don’t mean “nothing”. They have already happened, it’s in the past. What can the governments and folks in power do to make things better for everyone in the future.

    Graphs and data have become a hobby for economists. They have nothing better to do. Spitting them out is the best they can do. Has any economist done anything for the general populace.

    They are stuck in the quagmire of right and left instead of right and wrong.

    Give the same data to economists and they will come up with different graphs according to what their beliefs are – right or left. They will change it to anything they want.

    • “If a nation’s general populace have good and decent jobs and they know hopefully what they have today will stay with them tomorrow, no one gives a damn how other nations are doing.”

      Like the Irish in 2006?