PBS: Why Canada?s economy is headed off the cliff
 

Why Canada's economy is headed off the cliff


Why Canada?s economy is headed off the cliff

BY Vikram Mansharamani March 27, 2015

Editor?s Note: When we think of economic crisis, we think Greece. And maybe, closer to home, the collapse of Lehman Brothers or Florida?s overleveraged housing market. But rarely do our neighbors to the north come immediately to mind.

Just back from Canada, Vikram Mansharamani argues that they should. Mansharamani, a lecturer in the Program on Ethics, Politics & Economics at Yale University and a senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, is concerned about rising home prices and falling oil prices. The author of ?Boombustology: Spotting Financial Bubbles Before They Burst,? he?s also written for Making Sen$e about random class admissions at Yale.

Canada is in the midst of an unprecedented housing boom that seems likely to bust. I was recently in Canada and noticed a schizophrenic oscillation between housing exuberance and oil-price despair. What did it mean for the Canadian economy?s outlook? Upon returning to the U.S., I did some research. What I found leads me to the conclusion that Canada is now among the most vulnerable large economies in the world. Here?s why.

First, household credit. The seemingly conservative Canadian population has been voraciously consuming debt at a breakneck pace. Total household debt (C$1.82 trillion) now exceeds GDP (C$1.6 trillion), approximately C$1.3 trillion of which was for residential mortgages. Further, household debt is now greater than 160 percent of disposable income ? meaning it would take about 20 months for a family to pay off its debt if interest rates were 0 percent and they spent 100 percent of their disposable income to do so. Uh oh! The consumer clearly seems stretched, so much so that McKinsey recently suggested Canadian financial instability driven by a rapid consumer slowdown was not unlikely. By the way, that?s exactly what happened here in the United States when the debt music stopped and there weren?t enough consumer chairs to go around.

Second, housing prices. Home prices continue their basically uninterrupted rise that began in the mid-late 1990s. Unlike the United States real estate markets, which have corrected, Canadian prices continue to rise. Detached single-family homes in Toronto now average more than C$1 million and Vancouver is now deemed the second least affordable city in the world ? thanks to Chinese buyers (who are themselves facing a slower economy). Take a look at the following chart of U.S. and Canadian housing prices in real terms since 1990.

http://newshour-tc.pbs.org/newshour/...s-1024x726.png

It?s interesting to note that the data in this chart is updated through the summer of 2014, and we know that prices have risen since then. In fact, the Bank of Canada even suggested in December that housing prices were overvalued by as much as 30 percent. The IMF has also sounded warnings. Yet despite these alarm bells, there seems to be a widespread fear that prices will continue rising indefinitely, creating a ?get in or miss it? mentality that is unlikely to be sustainable.

Third, crude oil. The impact of lower oil prices is rippling through the economy at breakneck speed. Since 2011, Alberta, the oil-rich home of the oil sands, was responsible for more than 50 percent of all jobs created in Canada. It has been the locomotive of job creation pulling Canada forward, but it is now in reverse. Employment growth has stopped in Alberta and is now shrinking. According to construction industry association BuildForce, Alberta is likely to see sustained job losses for the next three years at a minimum. Further, because Alberta drew workers from all over the country, any provincial slowdown will have national ramifications on unemployment and consumer confidence. Fewer jobs in Alberta actually translates into less income throughout Canada. Yikes!

Finally, craziness. Yup, not sure how to better categorize what I?m about to say. Here?s the situation, as told to me by Seth Daniels of JKD Capital, one of the most astute Canada-watchers I know. Daniels told me that there is now a booming private mortgage market in which ordinary citizens are borrowing from their home equity lines to lend money to desperate borrowers. Specifically, he noted ?a homeowner acts as a subprime lender by drawing his home equity line at ~3%, and lends it to a subprime borrower at 8-12% for one year.?

I honestly didn?t believe him when he first mentioned this to me, but I then confirmed it myself. In fact, if you?re a Canadian and interested, here?s a sales pitch from one vendor. It?s only a matter of time before this shadow mortgage banking market slows, and the ramifications are likely to be enormous as defaults skyrocket, housing prices plummet, and consumer spending rapidly slows.

Net net, the ending of the Canadian credit binge, combined with an oil-driven economic slowdown, is likely to crush consumer sentiment. In this Looney Tune, it seems our Crazy Canadian Coyote has run off the cliff, his feet are still moving, but he has yet to look down. He?s suspended in air, and it?s only a matter of time until gravity exerts its force.

He's right, and anyone with half a brain can see that the federal/provincial/local gov't is bullshitting people by hyper inflating home values. Not only is it not sustaining, but it's absolutely bullshit. I'm surprised it hasn't burst yet after all these years of propaganda bullshit.

Look at the price of the home across from me is being listed for:
Home for sale in 4690 Hamptons Wy NW, Calgary | MLS® # C3649493

Just shy of 1 million dollars and it's not even a nicely appointed home as far as development is concerned. It's only 2600+SQ FT. It's got a regular developed basement (not even a walkout!!). The kitchen cabinets look cheap, the hardwood floors are run of the mill piece of crap. But that's how inflated the prices are here in Calgary.

If I took that million, I could buy a much much nicer property in the US and don't have to put up with the BS taxes here in Canada. I hold dual US/Canada citizenship and I can honestly say in Canada, we have to be the most taxed westernized nation in the world especially if you own a business. Thank goodness I am giving up my canadian citizenship by the end of the year. I'm sick of the bullshit that I have to put up with. It's like I feel dumber every day living in this rathole. I love how they say "we are much better off than the US". Keep drinking the nationalistic BS koolaid you ignorant stupid idiot.

Do they tax you if you leave the country (like the US does)? If not why give up the citizenship?

Yes, they tax you even if you leave the country as long as you hold the citizenship. :disgust

would be about time, after hearing this for over 15 years

So time to sell house and put money somewhere safe until it rebounds? Or just keep paying the mortgage anyway

A huge difference is that, unlike in the USA, mortgage interest is not tax-deductible. There is no artificial inducement to "max out" the mortgage for the tax write offs.

Comparing the two scenarios is artificial. The housing markets outside of Vancouver and Toronto are not overheated. I can imagine the two major markets experiencing a correction when overseas investors discover regions they deem to be a safer bet. But for now those same investors keep bidding up the prices in Toronto and Vancouver. Not anywhere else, though.

I have to wonder if the writer of the piece spoke to anyone other than those in the Vancouver and Toronto real estate markets? Methinks not based on the blanket country-wide conclusions.

:2 cents:

Had no idea. Seems crazy, but we have the hindsight of the U.S. recession and housing market crash.

This house, where I live (less than 60 miles from Canadian border) would cost around $200k to build on a lot 2-3 times the size.

In Tampa you could have that house and $700,000 in the bank.


.

Yeah, the sky is falling, the sky is falling. I've been listening to the "experts" for the past 10 years predicting a housing market crash in Canada.

Sure. But where would you live? In a van down by the river?

+1. So true. There is so much mis-information in the original article. For example, household debt in Canada has been actually SLOWING DOWN for the past 4 months.

And, yes, the effect of lower oil prices will drive down some sectors of the economy, but will also help others (manufacturers, exporters - especially because of the depressed Cdn dollar).

There is also a lot of things right with the Canadian economy - a conservative and stable banking sector, a low national debt level, and likely a balanced federal budget later this month.

It's crazy. I'm addicted to HGTV and most of the shows there Canadian based. I'm still not sure how it works up there. :1orglaugh

:thumbsup

comparing both economies .. is pointless ... they have very little in common :2 cents:

After years and years of renting an upper townhouse, I finally bought a house and to me the timing couldn't have been better. The mortgage rate is right around 2%, and the banks are eager to lend, and even tried to get me to borrow money I didn't need to borrow.

The price of the houses in Vancouver and Toronto are very high. Small tiny homes in Vancouver easily sell for over a Million dollars, and upper Edmonton was doing the same until the oil price drop. Here in Quebec though the prices are much less. I have a huge new construction 4 bedroom 4 bathroom 2 story + full height finished basement on a fair size lot in Laval, just 5 minutes from Montreal, and didn't have to go broke getting it. In other words, prices vary wildly across Canada depending where you choose to buy.

Ya it's insane, i live in Toronto and bought my house for 320k 5 years ago. Had it appraised last summer and would probably sell for about 525k. All foreign money pushing the prices up here.

yep lol love it or list it. The cheap houses are 500k and alot of the people have avg jobs. Im a fire fighter and my wife is a teacher, our budget is 750k for a house. Im like what do they pay in canada? lol

We're thinkin' of listing our place this spring - likely around the $160-$170k range (Niagara region). We've checked the MLS listings for our street and the price is comparable to other houses - although we have considerably more sq. footage and a larger property.

The same house and property in Toronto would go for >$500k (depending on the area, it could be upwards of $750k).

Harper is the problem, and his followers mind set. Much like your repubs, but no where near that dumb.

Damn I thought the US was the only place to do that.. my condolences..

If you declare that you are not a Canadian resident and you give up your medicare and driving license, you can live abroad and not pay taxes while retaining your Canadian citizenship.
As a matter of fact when prime minister of Quebec Dr Couillard was running to be elected, the opposition raised the point that while he was working in Saudi Arabia he did not pay any income tax to the Canadian Government
here is the link
Bernard Drainville says Philippe Couillard should have paid Quebec taxes | CTV Montreal News

Housing market will most likely not crash in Vancouver. Foreign investment has driven up the market for sure in the last 10 years but there is a reason they are investing here and they always will. It may level off like in 2009 but demand will never die here.

If your not from Vancouver you wont understand. It is predicted there will be another million people living here by 2030.

Rest of Canada I'm not sure off, especially Alberta.

you might want to check that.

Taxation for Canadians travelling, living or working outside Canada - Travel.gc.ca

Generally, when you leave Canada to live in another country (emigrate), you become a non‑resident of Canada for income tax purposes. For more information about the tax rules that apply for the year you become an emigrant from Canada, see Individuals ? Leaving or entering Canada and non-residents

You are a non-resident of Canada for income tax purposes if you:

normally or routinely live in another country and are not considered a resident of Canada
do not have significant residential ties to Canada, and
live outside Canada throughout the tax year, or
stay in Canada for less than 183 days in the tax year
Non-residents of Canada are required to pay taxes only on certain income from Canadian sources.

For more information, see Individuals ? Leaving or entering Canada and non-residentsYou will find information about certain income tax requirements that may affect you.

"One Mllion Dollars" - Dr Evil
 

If that house is a million, then I need to start advertising mine in the Calgary paper and hope I find a sucker.

Actually that happened here in the early 80's. People in California were cashing out of the over-valued houses and moving here thinking they were getting bargains. They paid double triple or more what they could have paid a few months before.

They only tax you on earnings in Canada, and on foreign earnings if your residence is less than 6 months in Canada, otherwise you are off the hook

They still tax you regardless. If you own properties outside of Canada that you rent out, you are obligated to declare it on your income tax and they taxed me on it as "revenue". Even the money in a Canadian bank account that earns interest/dividends has to be declared and taxed. Furthermore if that wasn't even disgustingly screwed up as it is, my Grandfather recently passed in another country and they taxed me on my inheritance as you are only allowed 1 "inheritance" that is free from taxes. Because I got the 2nd inheritance, these ass clowns taxed me on the inheritance I received even though my grandfather lived on the other side of the continent in a different country and never set foot in Canada. Ask yourself how messed up is that :mad:

do you inside or outside of canada?

You are also arguing seperate points.

"Yes, they tax you even if you leave the country as long as you hold the citizenship"

Well that is not entirely true. And the way you make it sound as if on everything is 100% not true.

Did you "bring" the money into Canada? If yes, it's taxable. Sounds pretty simple, and fair, to me.

The revenue from my rental properties in the US? No
Money in my Canadian Bank account earning interest/dividends? Yes
Inheritance from my grandfather's estate? It went through my canadian attorney but deposited into my US bank account.

Why do you even keep a Canadian bank account?

Are you a permanent resident of the USA or citizen?

Do you own any property in Canada also?

Location, location, location. It is what has always driven real estate prices (occasional necessary corrections aside) and what always will.

The reason you can build that house for $200k on a lot 2-3 times the size is because not enough people want to live "less than 60 miles from the Canadian border."

That same house in a DC suburb would be pushing $700k, or more. Because there is not enough land for all the people that want to live within 20 minutes of the White House.

Depends on where you move to. They do NOT tax you if you move to most countries (not sure about the US). You just say so on your income tax return & away you go.

As for the US, you usually have to file EVERY YEAR (even if it's to say you didn't make anything) & this is no matter where you move to.

AND, in the last 4 years they started hounding EVERY country in the entire world so that if you are an American & you open a bank account in another country, the US has to be told you have an account there & I'm guessing they can find out how much you have in there.

Because of this, some countries won't even let Americans open a bank account b/c it's too much trouble for them to have to then file with the US.

I could be wrong, but I don't think ANY other country in the world has that much power to see what you have in another country.

Love the US for many of its benefits, but after having lived in both countries now, there are some things Canada is better for.

Of course the article above is NOT one of them. Housing & rent used to be VERY affordable back in the 80's until the conservatives took over, & the property taxes are OUT TO LUNCH. I'm surprised you didn't mention that.

A lot of what goes on in Canada is hidden from the public, & Canadians generally don't make a ruckus about much, which is why nothing ever changes for the better. That's one of the things I love about Americans.

I'd keep your Canadian passport just for traveling around the world. This decreases your chances of getting killed & I'm not joking either.