To
be sure, Mr. Carney no longer sounds as worried about a housing bubble as he
did last year. On Wednesday, he indicated that repeated warnings by him and Mr.
Flaherty may be scaring Canadians straight, curbing their appetite for debt.
But both men are up against history. When property prices get this frothy,
pendulum swings are more likely than soft landings.
Such
is the pickle in which Mr. Flaherty and Mr. Carney (at least until the latter’s
departure for the Bank of England) find themselves. Their risky experiment in
guiding Canada through the recession by stoking housing demand is threatening
to come undone. Household debt (largely the result of ever bigger mortgages)
remains much higher in Canada than it was in the U.S. just before the 2008
crash. It wouldn’t take much to turn a vulnerability into a calamity.
Back in 2002,
Paul Krugman famously said:- "To fight this recession the Fed
needs…soaring household spending to offset moribund business investment. [So]
Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
And that's exactly what happened.
Similarly in
Canada, the so called "recovery" after the financial crisis was based
on inflating the housing prices. The modest growth achieved during last four
years was mostly fueled by real estate inflation. As sales tumbled over the
last six months, no wonder last quarter's GDP was a dismal 0.6% increase.