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Overpriced Real Estate Might Be the Only Thing Holding Up Canada’s Economy

In other news: young people in urban centres have given up on buying houses, consumer debt continues to rise, and West Coast homeless shelters are overcrowded with out-of-work Albertans.

by Sarah Berman
Aug 3 2016, 9:45pm

What goes up... Photo via Flickr user Colin Knowles

We've been hearing a lot about Canadian real estate in 2016, often alongside the word "bubble." While this may be a source of anxiety for a lot of us, a recent Financial Post breakdown of Canada's economic performance says the overheated housing market is actually the one good thing we've had going for the last two years.

According to a recent Statistics Canada report on GDP, Canada's current economic growth is the slowest it's been in more than half a century. Real estate has been the biggest area of growth since oil prices dropped off in 2014, while Alberta's oil and gas industry continues to bleed red ink.

Jeff Rubin, former CIBC World Markets chief economist and author of The Carbon Bubble, says it makes sense that capital is moving out of oil and into things like real estate, but dependence on housing fueled by low interest rates also comes with some risks. "That's a double-edged sword," he told VICE, "because the rise in housing prices, particularly in places like Toronto and Vancouver, raises affordability issues."

Depending who you ask, Canadian markets are either starting to rebound after ten months of stagnation, or just waiting for another shoe to drop. In the meantime, young people in urban centres have pretty much given up on buying houses, consumer debt continues to rise, and West Coast homeless shelters are overcrowding with out-of-work Albertans.

Back in June, governor for the Bank of Canada Stephen Poloz said "we have the right to be optimistic" as oil producers returned to work after the Alberta wildfires. But if you ask Rubin, who's also a fellow at the Centre for International Governance Innovation, he thinks Canada's oil sector still has further to fall, and it won't be easy for other industries to pick up the slack.

Rubin explained that the world is headed for a period of slower growth and low oil costs, and that Canada's high-cost, low-payoff oil sands have yet to scale back to match market conditions. While high-cost producers in the US have cut down on production, he said Canada apparently didn't get the memo: "The global oil market is no longer growing at a rate that will accommodate an expansion of high-cost oil, or even current production of high-cost oil," Rubin told VICE. "There hasn't yet been a cutback in the oil sands. They're still increasing production, even though it's hemorrhaging red ink."

As for the housing market, Canada's major banking regulator recently made some banks beef up stress testing in case of a major crash in the market. Last month, the Office of the Superintendent of Financial Institutions told private banks to see if they can handle a 50 percent price drop in Vancouver and a 40 percent drop in Toronto—up from the 30 percent stress testing required after the 2008 financial meltdown. Then there's the $13.7 billion in short bets against Canada's major banks, according to a new Toronto-based real estate blog. (To say nothing of the chief officers at those banks who happen to be selling their multi-million dollar homes.)

To recap: unless you're the head of a bank or a homeowner who got into the market early, it might take some serious self-delusion to find good news in Canada's economic outlook.

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