|Mixing oil with property bubble: Chinese investors snap up Canadian real estate, sending prices soaring (top) while Canada’s oil-exporting economy sees red with the collapse in crude prices|
TORONTO: For years, the global community praised Canadian financial conservatism and the country’s success in skirting the global financial crisis. Canadian banks were seen as among the world’s finest, appropriately capitalized, and well-run. They still are. Globalization and interdependency, however, are perniciously eating away at the fortress of stability that Canada once was.
The country is today one of the world’s most vulnerable large economies, and there are three key reasons for this precarious position: First, Canadian household debt levels are extremely high by almost any measure. Second, housing prices are elevated and continue to rise, driven by both confident Canadians and foreigners. More debt accompanies these higher prices, further escalating the vulnerability. Lastly, the proverbial straw that may break the Canadian camel’s back is the recent collapse of crude oil prices. Lower crude oil prices are rippling through the energy-exporting economy and will adversely affect employment, the federal budget, consumer confidence and ultimately real estate. The virtuous cycle appears poised to turn vicious.
Let’s begin by looking at Canadian household debt. According to the McKinsey Global Institute’s February 2015 report “Debt and (Not Much) Deleveraging,” Canada’s household debt-to-income ratio grew by a staggering 22 percentage points between 2007 and mid-2014, matching household credit growth in China and lagging that of Greece (30 percent). Meanwhile, US household credit actually shrank by 26 percent as risk aversion led to rapid deleveraging.