5) A Real Estate Quandary
Canada’s financial system earned praise in the aftermath of the financial crisis, as real estate values north of the 49th parallel did not suffer the same collapse as those in the United States.
For several years thereafter, however, Canadians have received a barrage of warnings about how their overheated real estate market is slated for a collapse.
Construction employment as a percentage of total employment hit 7.9 percent in February, its highest level on record.
Investment in residential structures bounced back quickly after the recession and remains close to 7 percent of GDP, a height eclipsed only prior to the housing busts of the late 1980s/early 1990s and in 2007:
The Bank of Canada has warned that real estate is overvalued by up to 30 percent.
Most warnings about an imminent U.S.-style housing crash in Canada, however, come from outside the country, particularly the U.S.
Bets against Canadian real estate are typically expressed by shorting the Canadian banks.
The Canadian Imperial Bank of Commerce, the most domestically oriented among the big players in the space, has short interest as a percentage of float at 1.94 percent on its Canadian listing, but 3.63 percent on its U.S. listing.
All the while, the national median home price has continued to climb to all-time highs.
The headline national statistics, showing the MLS Home Price Index up 5 percent year-over-year in April, fail to demonstrate that this strength has become intensely localized to two major metropolitan areas: Toronto and Vancouver. Across the nation, values have declined on an annual basis in Regina and Saskatoon, have risen less than the rate of core inflation in Montreal and Ottawa, and are cooling quickly on a monthly basis in Calgary.
“Strength in two of the biggest markets, Toronto and Vancouver, have been well beyond what the underlying economic situation would justify,” said Bank of Montreal chief economist Douglas Porter. “Even relative bulls like us have got to be a bit concerned about how hot it’s become, especially in the single-family market.”
Though additional macroprudential measures to cool this two-legged market are not expected in the short order, continued robust home price growth in those two cities could force policymakers’ hands in late 2015 or early next year.
If Canada can successfully engineer a “soft landing” for the real estate market, the nation’s housing finance system and regulatory framework will receive a closer look from government
If not, Canada will become yet another cautionary tale of what awaits nations in which residential construction and home price appreciation become divorced from economic fundamentals.
6) Peak Uncertainty
Lack of reliable foresight into the future course of events is one of the few constants in the human experience.
But in the case of Canada, the range of opinion on how the economy will fare over the next two quarters has arguably never been larger.
Standard Chartered Bank, for instance, is forecasting a technical recession for Canada, calling for the economy to contract by 2.4 percent in the second and third quarters. Deutsche Bank, on the other hand, sees strong growth of 3 percent in the second quarter followed by a 2.3 percent expansion in the third quarter.
This uncertainty is amplified by the upcoming federal election, scheduled to take place on October 19. At present, the daylight between the three major political parties on economic issues is not immense. However, the eventual winners will end up shaping the pace of infrastructure development, access to markets, and climate policy in Canada over the next five years, with their actions likely to outlive their time in power.