Why The Canadian Economic Scheme Has Non Blown Upwards Yet

In my previous article, I argued that the Canadian economic scheme is doomed as a final result of its housing bubble. My declaration is non based on line of piece of work solid prices together with exclusively indirectly on excessive household debt levels; the machinery for the slowdown volition live the restructuring of the labour market. Too many people are working inwards Construction, together with at that topographic point is no machinery inwards sight for them to transition to some other other work, absent a long, painful recession (as seen inwards the United States, where the exact same procedure is even hence underway). But the query arises – why has this non happened already?

My declaration is that at that topographic point are 2 equilibria for the Canadian economic scheme – ane where at that topographic point is self-reinforcing effects that drive stronger growth, together with the other where the negative effects volition drive a downward spiral, at to the lowest degree until the automatic stabilisers kicking in*. (Many heterodox economists dislike the purpose of the term “equilibrium”; I am using it hither every bit it is used inwards mathematics: a steady province condition.)  Canadian economical increase is currently mediocre, only the growth-reinforcing equilibrium is even hence inwards evidence.

One way of seeing why the housing bubble poses to a greater extent than adventure than powerfulness live supposed is the fact that housing represents a real unlike type of economical proficient than other goods together with services. The problems associated amongst reallocating production betwixt unlike types of output hit non appear inwards unmarried consumer proficient models that are the backbone of mainstream economical modelling.

The tabular array below discusses the forces that concur the economic scheme inwards each equilibrium.

Good Equilibrium (Current State)	Bad Equilibrium (Potential Future Outcome)
Excessive housing marketplace activity generates a lot of job inwards Construction, Real Estate, Finance together with ancillary activities (moving, Notaries, etc.) which are labour-intensive.	Less housing activity volition strength these sectors into downsizing.
Influenza A virus subtype H5N1 stable labour marketplace supports household formation, which buoys line of piece of work solid prices.	Influenza A virus subtype H5N1 weakening labour marketplace leads to less housing demand. Boomerang children provide to their parent’s house, reducing household formation.
Influenza A virus subtype H5N1 stable labour marketplace encourages immigration.	With no job, why stick roughly inwards -30 Celsius winters? There is ever churn inwards immigrant populations, together with a weak labour marketplace encourages the provide to the domicile country.
Influenza A virus subtype H5N1 positive outlook for housing encourages the accumulation of condominiums past times investors.	There is currently a large reveal of “trapped longs” inwards the condo market; at that topographic point is a real large inventory of units that they volition eventually convey to sell.
Rising housing prices allows households to borrow against their domicile equity using domicile equity lines. This coin is typically spent.	Falling prices volition strength the Canadian banks to line dorsum on credit lines. This volition created a forced upward motion inwards the Household Savings Rate.
Consumer credit losses are minimal.	As Hyman Minsky pointed out, it is hard to generate credit losses when lending against assets that are rising inwards price. The touching of weakening credit standards are non apparent until the bubble bursts. Sub-prime lending was the “secret sauce” for American fiscal sector profitability pre-2008. Since then, non hence much.
Housing turnover generates equity extraction via households leaving the housing market. Older households purpose this coin to fund retirement spending.	Lower domicile sales reduces the powerfulness of the older generation to “cash out” their housing wealth, which generates precautionary spending cutbacks.
Strong consumer spending creates jobs inwards Retail. There has been considerable additions to retail capacity, inwards add-on to housing units.	Retail together with Restaurants volition live forced to retrench every bit consumers cutting back, hitting some other 2 labour-intensive sectors.
Influenza A virus subtype H5N1 considerable component of Canadian manufacturing involves production of structure materials approved for local housing standards. (The exclusively non-food, non-Auto goods produced inwards Canada that I run across when shopping are inwards the hardware store.)	Less structure agency less investment past times Canadian structure materials manufacturers (investment beingness both majuscule expenditure together with inventory building).

The self-reinforcing nature of the electrical flow equilibrium has kept the Canadian economic scheme growing, fifty-fifty though the parallels amongst the province of affairs inwards the the States convey been drawn for years. However, housing structure has moved from larger unmarried menage unit of measurement housing units towards condominiums. There is non a lot of proficient character housing information available inwards Canada, only it seems most sure enough that an increasing reveal of these condo units are beingness held inwards inventory past times investors. This condo inventory likely represents a negative bear seat for these investors inwards aggregate. The Greater Fool weblog past times Garth Turner analyses of proficient component of what information are available.

This condo inventory accumulation represents the weak link inwards the electrical flow equilibrium: condo investors are putting increasing amounts of their majuscule at adventure inwards gild to subsidise the ongoing increase of the Canadian economy. This is a recurrent designing amid investors, only eventually investors hitting their capacity to finance the accumulation of negative bear assets.

In upcoming entries, I volition hash out the timing of when a alter of equilibrium could occur, together with the implications of the alter of equilibrium.

* Both cases of self-reinforcing increase together with self-reinforcing weakness are examples of positive feedback. The business office of automatic stabilisers (largely generated past times the Welfare State) represents negative feedback, every bit they damp oscillations. Many commentators incorrectly term the growth-reinforcing effects every bit a “positive feedback loop”, together with a downward spiral every bit a “negative feedback loop”, based on the verbal connotations of “positive” together with “negative”. As an ex-Control Systems engineer, this bugs me.

(c) Brian Romanchuk 2013