Where's the f'ing money, Lebowski?

There's a old saying about neo-classical economists ability to for-see events:  they've successfully predicted 7 of the last 5 recessions. The same can be said of marxist-economists who are sure about the imminent collapse of the economy about twice a decade.

In Canada, the marxists could end up being proven right thanks to a second major (Canadian only) economic collapse that could be just around the corner.

The centre of this collapse could end up being the same as the centre of the US collapse: real estate.

Condominiums to be more exact.

Canadian condominiums have been built at a blistering pace for the last ten years.  They have been at the centre of two property explosions - in Toronto and Vancouver - though prices have been rising across the country.

While this might seem like simple growth due to 'demand', the reality is that both have been predicted to be massive economic bubbles, the popping of which could lead to ruin of the entire country.

In Canada, billions of dollars have been put into condominiums and real estate; Toronto's real estate industry is estimated at $40 billion.  The speed has been blistering, with many observers complaining that the condos are poorly built and probably going to start crumbling in 20-30 years.

While an increase in prices in Canada was similar to what was seen in the US during their real estate bubble,  something interesting happened in Canada in 2009.  While housing prices went down and stayed down in the US, in Canada they dipped for a second in 2009 and then shot back up.

According to the University of Toronto Cities Centre, this explosion in housing construction and prices have been the primary drivers of growth in the canadian economy since 2001. If you take this industry out of the equation, then economic  growth has been flat.

The explosive growth in 2009 was not a fluke.  Though housing prices had grown in tandem with US prices starting in 2002, Canadian rules had always been considered stronger and more stable than those in the US.  

It's a mantra that has been repeated over and over again, in analysis about Canada's role in the crisis: Canada's lending rules were better.  The CBC repeated this in their analysis of the subprime crisis, "about 20 per cent of all U.S. mortgages are of the subprime variety in 2007. That compares to just five per cent in Canada, according to industry figures."

Of course what they didn't mention was that it's not true anymore - things changed in 2006.  At that time, a new Conservative government in Canada relaxed mortgage rules, making them more like the US.  Concerns were voiced by many - including the former Bank of Canada head.  

These new lax rules went ahead anyway and have been responsible primarily for the explosion of mortgage debt in Canada and many subprime-like mortgages since 2006.  This mortgage debt has meant that personal debt for Canadians has skyrocketed and has many worried about the state of the economy.

The worry finally got to the Conservative government who went back to the stronger, pre-2006 mortgage rules last year.  But not before prices - and personal canadian debt - had shot up to astronomical levels.

Immediately following this, housing sales across Canada have been plummeting.  

But what about that crash?

In the US, from 2002-2008, trillions of dollars in mortgages where the backbone of the economic boom - and an explosion of debt.

The debt ended up being a massive bubble - with major players in the economy and most of the public caught completely unaware of the chaos that was about to ensue.  

The bubble popped; the exponential, unstoppable rise in housing prices halted.  People who could only keep their homes under prevailing conditions, all of a sudden couldn't keep them anymore.  Housing prices fell, banks foreclosed and lost money, and the good times were suddenly rapidly over.

Sound familiar?

The US saw a post-bubble pop that lead to major losses for banks, a total freezing of lending at every level and a massive depression that continues to this day.

In Canada, many are expecting simply a popping of the real estate bubble and no more growth in the housing sector - what some would call a slowdown.  

However a couple of things risk seeing Canada's economy crash - with a US style downturn.

First, if the U of T Cities centre is right and a lot of the growth's coming from housing industry, then a housing bubble pop will have far reaching effects on the job market in Canada.  The domestic demand for construction jobs, concrete, wood, steel could all go down.

Secondly, though lots of Canadian debt is wrapped up in mortgages, home equity loans make up another large portion.  These loans, taken against the value of someone's home (and common when hosuing prices keep going up), usually create a lot of spending in Canada.  If they dry up it could mean another hit to the economy.

Thirdly, in any economic crash, the group hurt the most is the one that ends up taking the losses.  While losses for home owners or banks could unleash all sorts of horrible effects, a major government bailout could see all the losses put onto the Canadian government - or us - what the former bank of Canada head called "privatization of profits and socialization of losses."

If this last scenario happens, look for a major downgrade of Canadian debt, a government bailout and austerity measures a la Greece.

And misery. Lots and lots of misery.

The Lebowski blog tracks big piles of money.  It appears regularly on the Toronto Media Co-op.