Investing Strategies 3-Book Bundle by Dustin Alan;MacBeth Hilliard;Cunningham W. H. (Hank);

Author:Dustin, Alan;MacBeth, Hilliard;Cunningham, W. H. (Hank);
Language: eng
Format: epub
Publisher: Dundurn Press
Published: 2012-01-11T00:00:00+00:00

Chapter 8

Canadian Exceptionalism

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It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

— Mark Twain

Canadians have come to believe that the financial crisis and U.S. housing crash was unique to that country. There is a widespread and strongly held view that there are factors that make Canada different in the rules that determine how authorities finance housing and how the banking system is regulated and therefore Canada will either avoid a correction in housing prices altogether, or if there is a correction, will sail through a future housing slump without a financial crisis. This attitude is wishful thinking, although it’s understandable since repeated statements from government leaders have fanned the flames of complacency for years. In the chapter on government involvement in creating the bubble and the expansion of the CMHC, we saw how some leaders preferred to promote a whitewashed view of the Canadian situation.

Given the severity of the U.S. recession that ended in June 2010 it’s understandable that Canadian leaders would wish to instil a sense of optimism about future prospects for Canada. A positive view of the future encourages consumers to start spending again and businesses to invest. The sectors of consumer spending and construction taken together make up more than 80 percent of GDP, so such statements were useful to pull the economy out of recession. When the housing construction sector came out of a brief downtrend and resumed its torrid pace, the Canadian economy parted from the U.S. path.

Before and since the GFC, Canada’s economic growth trajectory has been better than in the United States. The Canadian residential construction industry soared to an unprecedented level of more than 7 percent of the economy, surpassing the 6 percent peak level in the U.S. reached in 2006. The Canadian recovery since 2009 was helped both by a strong housing sector and the expansion of the oil sands.

But the housing sector also means extensive borrowing, increased household debt, and developer financing for the construction of housing and condos. The average Canadian household made legal commitments in the form of financing that will last decades and involved interest obligations of hundreds of thousands of dollars. Rapid growth in housing construction implies unusual growth in housing-related debts, mortgages, and HELOCs. Soaring private-sector debt levels mean that any subsequent downturn will be more painful than if more prudent rules had been established and held firm against the pressure from the homebuilders, lenders, and construction industries’ powerful lobbying to get more credit flowing with looser rules. But in a quest to encourage growth and recover from a nasty recession the government succumbed to the pressure, actually relaxing the rules in the middle of a boom and before the recession began, as has been explained. Government leaders decided to kick the can down the road even though it will mean a rougher ride for heavily indebted Canadians, at some point.

As a result of this better relative performance in Canada, a myth

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