Investors would be hit hard, too. The Canadian markets have never been more exposed to the resource sector. The S&P/TSX Composite is four times as resource-intensive as Canada’s overall economy, according to CIBC World Markets. If commodity prices tank, the energy and mining companies that powered returns over the last decade could act like an anchor on investor portfolios.
But it’s Canada’s housing market, and those who have overextended themselves with massive mortgages, that stand to lose the most. The housing sector has become inextricably tied to the broader story of Canada’s elevated standing in the world. It’s a powerful and psychological link, says Shiller, who explored how bubbles form in his book Irrational Exuberance. “Bubbles are mediated by price increases and new-era stories,” he says. Any time you hear talk of a new era—such as Canada becoming the envy of the world, or that soaring commodity prices are here to stay—and it’s used to justify rising prices, it’s a good sign you’re in bubble territory. If a commodity bust does occur, one of the key foundations of the housing bubble would crumble along with it.
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For now, economists remain divided on how the Canada boom will play out. Doug Porter, deputy chief economist at BMO Capital Markets, says the brief commodity market downturn in 2008 revealed how much Canada needs the resource sector to remain strong. But he argues the 20-year bear market in commodities during the ’80s and ’90s means we are only halfway through the current rebound. Likewise, Haber says those forecasting a downturn are themselves misreading history. “What Canada has are strategic resources that emerging economies need,” he says. He points to Canada’s oil sands, which are seen as a more stable source of petroleum given unrest in the Middle East, and says that supply shortages will keep oil prices high for a long time to come. “This is only the second act of a three-act play.”
On the other hand, Tom Bradley, president and co-founder of Steadyhand Investment Funds in Toronto, has been warning Canadians not to buy too heavily into the mantra that Canada is a safe haven. “People see us as a safe play on the emerging markets,” he says. “But that doesn’t mean we’re safe.” If anything, with the dollar so strong and the TSX near its all-time high, Bradley says now is the time for Canadian investors to look beyond our borders.
Perhaps there’s another reason to be anxious. Lately the term “Northern Tiger” has been used a lot to describe the Canadian economy. Given what happened to that other once-booming, now devastated “tiger,” the Celtic one in Ireland, it’s best not to get too used to it.
