House of cards

The biggest boast of the Harper government up in Ottawa -- and these are people that like to boast a lot -- is that thanks to their stewardship, Canada avoided the worst effects of the global economic meltdown.  None of the country's major financial institutions needed a bailout, and the banking sector is widely regarded as the soundest in the world.  These themes are likely to be a major part of the Conservative Party's election platform next year.

A lot of this is, in fact, true, and some of the credit does indeed belong to the Tories.  Finance Minister Jim Flaherty took a very hands-on approach to the banks, particularly in the area of mortgage lending, which helped to avoid some of the wilder excesses seen south of the border.  Credit must also go to the previous Liberal government, which in the late 1990s prevented two pairs of banks from merging.  Those mega-mergers would have created precisely the kind of too-big-to-fail and too-unwieldy-to-manage banks that ran into so much trouble around the world.

But there's more to the economy than just a financial system, and in other respects Canada hasn't done so well.  The manufacturing sector has been gutted, thanks to a high exchange rate, uncompetitive energy prices and the growing presence of Mexico in the key automotive sector.  The big bet on energy seems to be starting to unravel as the US becomes increasingly self-sufficient and environmentalists stymie all attempts to get the product to market.

All in all, the strength of the banks notwithstanding, it's no surprise that sentiment surveys regularly show that Canadians are gloomy, or at best cautious, about the economy.  So it was something of a surprise to learn from Statistics Canada last week that Canadian household wealth is now higher than it was before the financial crisis.  Why the long faces, guys?

Well, as an excellent op-ed piece by Carol Goar of the Toronto Star points out, the StatsCan data are a lot less reassuring than they seem.  Most of the increase in wealth reflects the continuing (some would say gravity defying) strength in the housing market, which has of course been driven by the Bank of Canada's persistent cheap money policy. (There's no end to this in sight: the Bank today kept its key overnight rate at 1 percent).  This has a lot of ramifications, some of which Goar points out: baby boomers, who own their own homes, are doing much better than the younger generation; and the poorest quintile in the population, who by and large can't afford homes of their own, are being left behind.

I'd add some further thoughts:

* since only the Toronto and Vancouver housing markets are really strong, there's a sort of redistribution of paper wealth toward those cities.  Just this past weekend, a realtor told me that in our neighbouring city of St Catharines, which has been badly hurt by the shrinking automotive sector, house prices have not budged for two decades. The same tale can be told in all kinds of communities across the country, which suggests that the Tories would be unwise to run only on their economic prowess when election time rolls around.

* household debt levels are near historic highs.  As and when interest rates start to rise, some people will get into trouble and try to unload their houses (or have them repossessed).  When that happens, the "wealth" tied up in the housing stock will tend to erode very fast.

* many baby boomers are counting on the equity in their house to see them through retirement (that's not counting the 14% who told a recent survey that they were relying on winning the lottery.  Sadly, I'm not making that up).  But who's going to buy all the houses the boomers want to sell?  Younger people, at least in the larger cities, want to live downtown, not on some kind of faux ranch out in the sticks.  An increasing proportion of them don't even bother getting a driver's license, which effectively rules out any move to the suburbs. Combine that with the inevitable rise in mortgage interest rates, and it's awfully difficult to see how the boomers as a group will cash out nearly as much as they expect when they decide to downsize.

These problems are by no means unique to Canada.  As the populations of the major developed countries age, there are similar issues to be dealt with everywhere.  However,  for all the empty bragging of politicians up in Ottawa, there will be delicate policy decisions to be made for many more years yet.