Canada's Housing Bubble

Employment picture brightens

Stats Canada released the latest job figures today:

Employment edged up for the second consecutive month in December, with an increase of 22,000. The unemployment rate held steady at 7.6%. Compared with December 2009, employment increased by 2.2% (+369,000), following a decline of 1.1% the previous year.

Lots of good news in this report.  Unlike most recent employment reports, the bulk of the new jobs in this case were added in the private sector and were full time positions.  Excellent news.

Interestingly, while most provinces saw gains in employment, British Columbia was the notable outlier.

Employment in British Columbia fell by 23,000 in December, pushing the unemployment rate up 0.7 percentage points to 7.6%. Compared with December 2009, employment in the province grew by 1.5% (+35,000).

Questions remain

Despite the broadly positive news, it would bear considering the following questions before extrapolating this trend into the indefinite future.  Note: All graphs are taken from the Stats Can publication highlighted above.

1)  Will the coming fiscal austerity hinder growth in the public sector which, despite the recent private sector hiring spree, has accounted for the vast majority of new job creation since the recession?

2) Can gains in construction sector employment continue to outpace broad job market increases in the face of a slowing real estate market and falling housing starts?  The sector currently employs nearly 1.3 million Canadians.  Housing starts have averaged nearly 200K for the past few years, outpacing net household formation (175K) and virtually assuring a slowdown absent significant government spending and/or business expansion.

Of note, while the recent rise in oil and gas prices have benefited that sector, employment in the oil and gas industries is less than 1/5th that of construction.  In addition, rising oil prices squeeze consumer spending resulting in at best a net balance of job creation.

My position remains that the full force of monetary deflation has yet to be felt.  House prices remain significantly elevated relative to fundamentals and at best sit in a precarious position with interest rates still hovering near all-time lows, and consumer debt and home ownership rates at all time highs.

As I have often argued, the employment and economic boom of the past half decade has been largely fueled by an expansion in credit, most of it tied to residences in the form of mortgages and HELOCs.  Coupled with low savings rate it has created a feedback mechanism of rising home prices floating on a sea of ever-expanding credit, rising consumer confidence and consumer spending, lower unemployment, and strong though illusory economic growth.  It is the great connection.

Should HELOC growth return to low single digits, which is quite likely if real estate experiences even a flat market, it would choke consumer spending by between 5 and 10 percent given recent CAAMP figures.  I estimate that this would represent a 2-4% drag on GDP growth, enough to cause negative economic growth absent unforeseen strength in other areas or significant government spending to cushion the blow.

I will be much more optimistic when I see employment growth occur alongside a reduction in consumer debt/credit outstanding, a move towards balanced budgets at the provincial and federal levels, and normalized interest rates and savings rates.  Until that point most economic growth and employment growth by extension will likely prove fleeting.

Cheers

Ben