Is Canada Next? (A Very Ugly Chart)

While the US has been struggling for five years with a recovery that has been so crummy that “recovery” often shows up in quotation marks, Canada has been rolling in good times. Its economy has been powered by a housing bubble beyond even US imagination.

I wrote about that phenomenon in April:

The gap between Canadian and US home prices is at an all-time record, with the average price in Canada now 66% higher than the mean price in the US. Even when prices are adjusted for fluctuations in the exchange rate … Canadian homes are still 50% more expensive than the already expensive US homes. What gives?

I included an eye-popping chart, going back to 1999, that compares US home prices, which have been soaring recently, to the totally out of whack prices in Canada. For more, read….  Canadian home prices make the torrid excesses of the US housing bubble look banal.

But housing bubbles – or rather construction bubbles that accompany them – are dreadfully serious business. As construction activity grows, jobs shift into the sector. Secondary industries start expanding to benefit from the construction boom, and jobs shift into them as well. A lot of jobs have shifted into these sectors for years. But now dark clouds are appearing over the construction sites.

Housing bubbles – that is, construction bubbles – give economies a terrific boost as they reach a crescendo because hiring and purchasing are so local and cannot be outsourced. They’re job-intensive, non-automated activities requiring manual labor by skilled, well-paid people. And they impact numerous facets of the economy. Materials and supplies need to be purchased. Dealers sell more pickups. Restaurants sell more lunches. Lumberyards are busy. Tools need to be replaced. Equipment dealers and rental companies hit homeruns….

When construction slows, that terrific boost turns into an even more terrific bust. Jobs evaporate overnight. Purchasing slows or stops. And very quickly, the overall economy gets hit.

Housing bubbles are invariably caused by cheap money. Central bankers deny that, and they refuse to see these or other bubbles, and even if they see them, they refuse to acknowledge them. But unlike stock market bubbles, which are merely unpleasant when they pop, housing bubbles are dangerous. They implode with pandemic force that reverberates harshly down Main Street.

The US housing bubble, when it imploded, generated enormous job losses, tore up the financial sector, and helped bring the economy to its knees. With its even more outrageous housing bubble at risk, is Canada next?

This truly ugly chart (via OtterWood Capital Management) depicts growth in hours worked (blue) and annualized GDP growth (brown). On a quarterly basis, they track with a fair amount of correlation. While the magnitude may be off, the direction is almost always the same. Only twice since 2007 has one or the other been negative, when its counterpart was positive.

But in the second quarter, hours worked plunged by a rate not seen since the middle of the Great Recession:

Canada-hours-worked-drop

Second quarter GDP hasn’t been reported yet. But if hours worked are any indication, it faces a steep downside risk. And when Canada’s magnificent housing bubble implodes, it will be difficult to find cover.

But don’t tell the Canadian stock market. The one-year chart of the Toronto Stock Exchange Index is a slightly jagged line going from the lower left-hand corner diagonally across the chart to the upper right-hand corner, just like the S&P 500, in its relentless daily pursuit of new records, come heck or high water. Another indication that worldwide central-bank gyrations are the only thing that matters – at least for now – and that reality, no matter how ugly, isn’t even on the radar anymore.

In the US, housing too is causing ripples once again. Mortgage bankers are already fretting about consumers returning to “reckless borrowing,” according to a survey by FICO. “That doesn’t feel like a healthy, sustainable growth situation,” the report pointed out. Read….  Mortgage Bankers: “Unsustainable Housing Bubble Is Inflating”

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  10 comments for “Is Canada Next? (A Very Ugly Chart)

  1. bill harsh says:

    Every word of this is true, especially in Ontario where the Liberal Govt will soon add more dead weight to the fragile economy by a new law of mandatory Pension contributions by employers. This will drive unemployment much higher.

  2. Joe says:

    In UK, I see ‘Office to Let’ boards everywhere and the same sign since 2008. What scary is that they still keep building more office blocks. My company is thinking to relocate to a bigger office and none of them are cheaper given with the amount of empty offices everywhere. These blocks are just covered with dusts.

    My guess is some investment firms are making interest payments and funding electricity bills and security guards wages without rental income. Some investors are getting seriously burnt because the recovery isn’t coming back, far from it.

  3. j ta says:

    “Mortgage bankers are already fretting about consumers returning to “reckless borrowing,” according to a survey by FICO. ”
    Why are the bankers fretting? If they don’t lend, consumers won’t be able to borrow. Perhaps their “fretting” is self-inflicted.

  4. chintan says:

    When are the Canadian GDP figures due for release ?
    It will be time to sell the world markets then.

    Oh wait, that will occur in ideal world. In our world, these news means more QE and new market highs. :)

  5. M Theriault says:

    I try telling anyone I know what we read here and they just laugh or make cruel comments about my sanity. Most shee er- people haven’t a clue how the world works because their normalcy bias won’t allow them to believe what they read even if they decided to come to this wonderful site and spend a few hours…

    My wife is sick of listening to me tell her that we should think about selling our house near Toronto, we have a lot of equity right now and she thinks it is going to keep going up and up. I don’t want to find out in the near future that we lose out on all that money because the interest rates are too high for anyone to buy our house. Or people don’t have jobs next year and can’t even buy my second car if I wanted to sell it. Horrible.

    • Bill Harsh says:

      I think you’ll be OK if your house is outside Toronto. For sure there is a bubble in the condo market and all the houses in GTA but since you’re outside you won’t loose as much as they will and besides you gotta live some where.

      • Mark B says:

        Unfortunately, that’s the same hopeful thinking I heard here in the States as the bubble burst. I live in the Portland Oregon area and the local papers all had variations on the theme; ‘our part of the country is different’. Usually justified with the argument that our housing prices didn’t increase as dramatically as Nevada or Florida, so we’ll be ok. It just took a little while longer for the bubble to burst but it did and prices declined equivalently. I seriously considered selling my house and renting when it doubled in value over about 6 years. We were actually looking at rental properties but didn’t pull the trigger and I wish we had. Yes, you have to live somewhere, but that can be a rental.

    • Craazycanuck says:

      Well, I get the same response, but take the flak knowing that at least I tried to warn friends and family. What also makes it incredibly hard is that those who have money to invest read the newsletters of their advisors and given that they made big gains last year are reluctant to opt out and swim against the stream.
      I couldn’t believe the newsletter sent to me (and the other MILLIONs of their investors ) giving bogus reasons for the relentless bull markets ( great profits and strong investor sentiment ) and that better growth going forward in Canada and the world means staying in the market is a no brainer. Sigh.

    • Mr. Reality says:

      Sell now and rent, then buy a home in 5 years at 30% off. Thats how you accumulate wealth.

      Mr. R

  6. Dark Chopper says:

    I’m from western Canada and we can not find enough skilled people. Alberta for example is importing skilled trades from Europe and U.S.A. If you need proof Google the Calgary Herald want ads or Edmonton’s or Red Deer’s.
    The Eastern part of Canada in the maritimes region is holding their own and making a decent wage. Traditionally the younger people go west to make the big money, some stay and some go back home to invest their hard earned dollars. All in all the wealth is spread throughout Canada.

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