Canada's Housing Bubble

Sep 14, 2010 thechronicleherald.ca

FOR PEOPLE and for countries, a particularly dangerous time is when you’re patting yourself on the back for avoiding the dumb mistakes your neighbour just made.

That’s true of Canadians, just now, as we bask in the relief of having largely dodged the twin bullets of banking and housing crises that continue to weigh heavily on the U.S. economy.

But a report on Canada’s prospects by the Paris-based Organization of Economic Cooperation and Development gives us good reason not to grow complacent. It nails a couple of homegrown challenges that could seriously curb Canada’s future economic growth.

One is the growing indebtedness of Canadian households. The 2008-09 recession was the first in which household debt continued to rise, and it has gone on piling up to historic levels. Most of this has been mortgage debt as Canadians took advantage of low recession-fighting interest rates to rush into a housing market that the OECD thinks is overpriced. The result, as the report points out, is that more families are now vulnerable to "future adverse shocks" as rates begin heading back up to normal territory. At the very least, a mortgaged-up nation will have less income to spend on other goods and services, a drag on growth.

So much for learning from the neighbours’ woes. Richard Florida, the "creative class" guru who teaches at University of Toronto’s Rotman School of Management, argues in a recent book (The Great Reset), that one lesson of the U.S. housing bubble is that it hurt long-term growth and competitiveness by sucking up resources that could have been more productively used in areas like energy efficiency and the knowledge economy. It would be ironic if Canadians made the same mistake.

One area where Canada needs innovation and ideas is health care. The OECD report does not see the eight-per-cent annual growth in government health spending as sustainable, particularly with a bulge in the elderly population on the horizon. And it rightly shines a harsh light on traditional cost control: Limiting beds, equipment and doctors simply means rationing, long queues and patchy service.

So the report properly challenges us to be more creative. Cut waits by funding hospitals for what they do, not on the basis of past budgets. Make doctors’ unions negotiate fees with health institutions to improve accountability. Allow some private insurance, but regulate it. Add resources through patient co-payments, balanced with caps and means-testing. Provide better drug coverage, but knock down the unnecessarily high price of generics.

As we said, this is no time for complacency.

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