Blame Canada: It’s Our Turn to Pop!
Nouriel Roubini was one of the most presciently pessimistic analysts of the global economy in the run-up to the global financial crisis. And now he thinks it’s happening again.
… Roubini sees housing prices getting out of whack in quite a few small and mid-sized nations that are well-governed and managed to avoid the worst economic effects of the financial crisis: Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand and the London metropolitan area in the U.K. …
It seems notable that the bubble markets of the last cycle don’t fit this story. It’s mostly the countries that managed to avoid price runups last time that are experiencing it now. Here, for example, is the price of new homes in Canada over the past decade:
Prices in Canada have been moving up in a more or less straight continuous line, pausing only briefly during the worst days of the financial crisis, whereas the U.S. prices experienced a devastating boom and bust. U.S. home prices are still far below their 2006 peak (and even further below when adjusted for inflation), whereas Canadian prices are reaching new highs. …
All the more worrisome, if you are a policymaker or just somebody who doesn’t want to see the world economy blow up (again), is that the continued rising prices are being accompanied by rising consumer debt in many of these countries. Here, for example, is Canada’s household debt to GDP ratio:
As it shows, Canadians are taking on ever higher debts relative to the size of their economy, a phenomenon driven heavily by mortgage borrowing. They are thus leaving themselves unusually vulnerable if interest rates rise or housing prices fall. By contrast, in the United States, after running up enormous household debts before the crisis, the level has been falling steadily relative to the size of the U.S. economy since then.
Perhaps scariest of all, if Roubini is right, is that if these are bubbles that eventually pop, policymakers will not have the tools they had in 2008 to cushion the blow. The world’s central banks, in particular, don’t have much (arguably any) room to lower interest rates further. Which means that if these regulatory tools aren’t up to the job, when the next global financial crisis comes, we can all take a lesson from the creators of “South Park.” It will be time to Blame Canada.