Canadian Housing Market - Boom or Bust?

In a talk with the Ontario Economic Council, U.S. economist Robert Shiller states Canada's housing market has been following a similar boom-and-bust path as that seen in the United States, but fundamental differences between the two leave Canada less exposed to the U.S.-style fallout.

“There have been booms in some Canadian cities – Edmonton, Calgary, Vancouver – but maybe [prices] are weakening or actually falling, at least in those boom cities,” he said, noting that the pattern somewhat resembles that seen in many U.S. and foreign markets over the past few years.

He does suggest that the relatively small use of subprime mortgages in Canada should mean the damage in this country will be much less severe.

“There's a difference. We [in the United States] have had a subprime revolution that I don't think took place, to the same extent at least, in Canada.”

Mr. Shiller said a bailout of the seized-up banking sector is an essential first step to cleaning up the mess left by the U.S. housing bubble, but it needs to be followed by financial innovations to support troubled home owners.

“Once we fix the leaky roof, we need to take a look at the foundations,” Mr. Shiller told the summit.

The professor – author of the book Irrational Exuberance and recognized expert on asset bubbles and the housing market – said U.S. legislators must act on the liquidity crunch that is gripping the banks in order to avoid a much longer-lasting economic stagnation. He believes Congress must reverse its decision to reject the proposed $700-billion (U.S.) troubled asset relief program (TARP), despite public anger over what many view as a handout to rich and reckless investors.

“The TARP program is really essential to enact,” he said. “The general public doesn't appreciate the severity of the crisis, and the threat it poses to their jobs and livelihood.”

He further noted that the research conducted on the Great Depression by none other than Ben Bernanke – now the head of the Federal Reserve Board and one of TARP's key architects – has found that a tied-up, illiquid banking system was a major contributor to the extraordinary depth and length of the Depression.

“When you don't have a banking system, you can't do business,” he said.

“We can't think that we want to teach people a lesson,” he said, suggesting that the blame for the housing bubble extends beyond bankers, lawmakers and regulators.

“It was erroneous thinking,” he said, blaming the bubble on a mass cultural shift in its mentality toward investing and housing.

“We've become more an investor culture – make a quick buck,” he said. “People got themselves convinced that home prices could only go up.”

Mr. Shiller's new book, Subprime Solution, came out Sept. 1 – just before a month of ground-shaking upheavals on Wall Street. The book's longer-term prescription for the U.S. housing market would involve help for distressed homeowners as well as major changes to the way the residential mortgage market functions.

“Financial innovation only comes in times of crisis,” he said. “We need to think of our financial institutions in a constructive and innovative way.”

His ideas include a permanent and ongoing system for automatically adjusting mortgage payment terms in times of economic shocks; government-subsidized independent financial advisory services; and new risk-management products that would allow homeowners to manage their long-term risk exposure to home prices, employment income and economic growth.
“In my book, I emphasize bailing out homeowners because they are the ones being hurt most,” he said. “But first, we have to deal with the banking system.”

Meanwhile, former Bank of Canada governor David Dodge joined the chorus of experts who believe U.S. legislators must solve their impasse over a rescue package for the troubled banking sector.

“The U.S. banking system needs to be recapitalized. Ben [Bernanke] understands that as well as anyone,” he said.

“How that is going to be done is another question.” Mr. Dodge made the statement during a break at the summit, a three-day Ontario Chamber of Commerce event that he is co-chairing.

Warmly,

Mary Wozny