Posthaste: How did Canada dodge collateral damage in one of its worst housing corrections ever? Maybe it didn’t

Canada’s housing market plays a pretty big role in our economy, much more so than our peers, the United States, U.K. and Japan.

So you would think that the latest correction where home prices plunged 20 per cent from peak would have had a bigger impact on the economy.

The decline is not far off what the United States went through in the housing crisis between 2006 to 2012 and the 26-per-cent plunge in national home prices then triggered a financial crisis and recession.

So how did Canada pull off, as Bank of Montreal chief economist Douglas Porter puts it, the “Great Housing Houdini Act.” 

Since home prices started falling four years ago, real gross domestic product in Canada has grown at a 1.7 per cent annualized pace, just below the 2 per cent average so far this century, said Porter in a recent report.

Canadians’ wealth has been a big buffer. Much is said about households’ high debt, but “the other side of the balance sheet is much larger,” said Porter. With the rapid rise of financial assets, the ratio of net worth as a percentage of income has more than doubled from 1990 to 1,021 per cent.

“This enormous stock of wealth helps act as a buffer against shocks, helping smooth spending over the cycle,” he said.

An aging population also helps as retirees tend to be less sensitive to cycles, and their spending more stable and predictable.

The share of people over 65 in Canada has risen from just over 12 per cent in 2000 to 20 per cent now, and they account for 22.4 per cent of consumption.

Then there was that population boom in the years coming out of the pandemic. The increased numbers supported spending just as interest rates were climbing so it looked like everything was ticking along just fine.

But was it? Between 2022 and 2023, when inflation was soaring, interest rates were going up and the housing market was correcting, real GDP per capita fell in four of the five quarters, by more than 2 per cent, peak to trough, said Porter.

At the same time, the unemployment rate rose by more than two percentage points.

Porter said such a rise in the jobless rate alongside the serious drop in real per capita GDP has only happened a “handful” of times in the past 60 years and only during officially date recessions.

“In other words, some of Canada’s Housing Houdini may have in fact been an illusion, not unlike the original act,” he said.

Sign up here to get Posthaste delivered straight to your inbox.

Should we be worried about Canada’s debt?

Public finances are in the spotlight right now as bond yields soar around the globe, but according to BMO Capital Markets chief economist Douglas Porter, “even sophisticated sleuths will struggle analyzing Canada.”

As his chart shows, general government gross debt was 131 per cent of gross domestic product in the second quarter, a level scarily close to the 1990s debt crisis. Yet net debt fell to just 17 per cent of GDP, the lowest in at least 40 years.

This gap is huge compared to other major economies, said Porter, and the reason is mostly down to the massive assets of Canada’s public sector pension plans.

“These two extremes send completely different messages about the state of Canada’s debt — either it’s nearly as problematic as most others in the OECD, or it’s absolutely no concern whatsoever,” said Porter.

The right answer, he said, is probably in between.

• Today’s Data: United States existing home sales, NFIB small business optimism
• Earnings: Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc, Wells Fargo & Co., Johnson & Johnson, Domino’s Pizza Inc.

Canadians can claim medical expenses if eligible on their personal tax returns which may even include the cost of travel to obtain treatment. But there are limits, as one taxpayer found out when he tried to claim over $7,000 for a trip to Turkey to get some dental work done. Tax expert Jamie Golombek fills us in on the case.

Interested in energy? The subscriber-only FP West: Energy Insider newsletter brings you exclusive reporting and in-depth analysis on  one of the country’s most important sectors.

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here