I have at various points (here and here) been driven up the wall by lazy journalists who have worked under the assumption that if the US housing market was crashing and burning, then so was Canada's. This premise has led to any number of articles cut-and-pasted from the south with 'US' being replaced by 'Canada'. These pieces were cheap and quick (no research necessary!) and they generated scary headlines. But they were completely stupid and degraded the public's understanding of an important issue.
So it is with a certain amount of satisfaction that I draw attention to a recent Bank of Canada working paper that examines the role of housing prices over the past few business cycles. It turns out that like the US, we have had an episode in which a housing bubble fueled a consumption boom that culminated in a long, painful recession involving significant restructuring. The difference is that our boom-and-bust cycle occurred in the late 1980's and early 1990's:
[R]ising house prices played an important role in consumption growth through the increase in value of housing collateral. This positive effect peaked in late 1986 but continued to have a positive effect on consumption growth until 1989…
Our model suggests that collateral effects contributed as much as 1.0 per cent to yearly consumption growth in 2000 and had a positive effect for most of the remainder of the sample. This contribution is less than in the period from 1986 to 1990, but one simple reason is that the house price increases since 2000 have been more gradual than in the late eighties when they rose to the same level in 3 years rather than 6.
In a previous post, I noted that in many ways, the current US situation resembled what Canada had to deal with in the early 1990's. It would seem that the parallel is even closer than what I thought.
Worthwhile Canadian Initiative 
Great observation Stephen, thanks for posting it.
But what were Canadian interest rates like in the late ’80s/early ’90s? I imagine today’s US situation was exacerbated by low interest rates, so that when housing values soared, the collateral was even more valuable because interest was cheap. I wonder what would have happened if Canadian interest rates were ultra low in the late ’80s/early ’90s. My guess is consumption would have grown even more.
Inflation was higher then, too. Inflation is helpful in deleveraging, which is something the US won’t be able to take advantage of in the near future.
Speaking of inflation, (sorry, slightly O/T) I noticed a CD Howe research brief on Price Level Targeting vs. Inflation Targeting. I thought it was interesting, as it discussed the importance of uncertainty in the observation of inflation, which hasn’t been raised here, unless I’ve missed it.
Andrew: “Inflation was higher then, too. Inflation is helpful in deleveraging, which is something the US won’t be able to take advantage of in the near future.”
Interesting thought. In a world of steady inflation, interest only mortgages are not a problem for example. If you can manage the interest portion, inflation will reduce the real value of the outstanding principal. We always used to argue that one of the costs of inflation is that it invalidated simple rules of thumb that people relied on (“mortgage payments should not exceed x% of income”). But maybe we are seeing the same principle in reverse now. People got used to the high inflation of the 70’s and learned new rules of thumb. Now those new rules of thumb are invalid again in a world of low or zero inflation.
Nick, do you mean that in an environment with high inflation, a mortgage has rapidly decreasing payments in real terms? I know I’ve heard people say that it’s ok to stretch on mortgage affordability and struggle to get through the first number of years, after which time inflation and wage growth would make the mortgage more affordable. Of course that assumes inflation and wage growth. With much lower levels of both, what one expected to be three or four years of tight budgeting may stretch of 10 or more.
Andrew: Yes, and I agree. It’s strange though that mortgages were never indexed to inflation.
I don’t know, the authors note that “One result that merits further investigation is that the estimated collateral effects onconsumption growth were smaller in the post-2000 period than in the late 1980s. This appears to be at odds with the fact that home-equity secured borrowing was much higher in the latter period. Home equity borrowing was less than 10 per cent of consumer credit in the late 1980s
and is currently over 50 per cent.” which leads me to be somewhat skeptical of the results.
May be related to the assumption of a constant loan to value ratio for borrowers now vs. 20 years ago which seems highly improbable.
Finally, the authors note that the difference in the impact mostly reflects that house price gains were concentrated in 3 years in the late 80’s and spread over 6 years in the recent run-up eyeballing figure C10 certainly suggests a similar overall impact now vs. the late 80’s.