Our latest issue should be hitting stands today or tomorrow with a story looking at the love-in that investors, both international and domestic, have for Canada at the moment. (Online-only readers will have to wait a week to read the piece at Macleans.ca. Better yet, go buy a copy of the mag.) You’ll have heard the “Buy Canada” thesis many times by now—our vast resources, supposedly prudent government finances, strong housing market and resilient job sector make us a stand-out in the global economy.
But there’s a weakness to that string of logic. All of those strengths we like to boast about are underpinned in one way or another by the phenomenal commodity bull market of the last decade, which has reshaped the Canadian economy. The thing to remember though is that commodities regularly go boom and bust. Always have. So is this time going to be any different? You be the judge. (click to enlarge.)
The above chart is from this week’s magazine story. It tracks the running 10 year annual returns in overall commodities. Through wars (both hot and cold), easy credit booms and even the U.S. industrial revolution, any time the commodity market has gone through a period like it just has, a nasty spill invariably followed. With the TSX down nearly 680 points or 4.7 per cent this week on softening commodity prices, there’s an argument to be made we’re cresting the peak once again.
Investors aren’t the only ones who should be hoping the commodity bull market keeps on a’runnin’. The real estate sector has benefited in a huge way from strengthening resource prices, thanks to low unemployment and higher incomes, not to mention the overall sense of invulnerability that’s come to pervade the Canadian mindset. But to truly appreciate the stunning heights Canadian house prices have reached, history is helpful once again. For our story we spoke with Robert Shiller, the Yale professor famous for developing the Case-Shiller House Price Index in the U.S. which tracks prices going back to 1890. In the absence of solid historical Canadian data, Shiller suggested “an exercise” of fusing his index with the Canadian Teranet-National Bank House Price Index, on the assumption that house prices in the two countries behaved relatively similar prior to 1990. Here’s the result: (click to enlarge)
By the looks of that, we’re well into uncharted territory. As Shiller told me, “This is just to give an impression how unusual things are in Canada now. Canada is going through a major historic boom, at least in comparison with booms in the US before 1990.” For what it’s worth, you can see Shiller’s full U.S. chart, and how house prices fell back to earth after the bubble burst, here.
I should mention that before posting the Shiller chart, I ran it past Simon Côté at National Bank of Canada who devised the Teranet index. He cautioned that the price gains of the past decade should be taken in the context of Canada’s nominal GDP gains over the past half century. Here’s what he had to say:
“I think you may find that, yes house prices have increased a lot in the past 10-15 years, but the price increases since the 60s or 70s may be in line with the change in GDP, in other words houses prices might not have increased more than the overall wealth of Canadians.”
Decide for yourself how much to read into the above charts. I’d just say that we’d all be wise to remember one thing: both resources and real estate are commodities, and rule #1 in commodities is what goes up, eventually comes down.