Most of Bay Street has argued there is little risk Canada could suffer the same kind of housing-led credit crunch that is now hammering the United States and to a lesser degree the U.K. but one economist argues all the ingredients are there.
David Wolf, Canadian economist at Merrill Lynch, said Canadians are just as personally indebted as their other Anglo Saxon cousins.
"We believe that markets remain overly sanguine with respect to the prospects for the Canadian housing market, the financial sector and the overall economy," Mr. Wolf said in a note.
Mr. Wolf said the underlying source of U.S. troubles stemmed from the simple fact banks lent people too much money to go out and buy houses but there were obvious danger signs in the data.
For example, every year from 1952 to 1999, U.S. households were net savers, but by 2005 household net borrowing had swelled to 7% of disposable income, which the credit curnch is now reversing.
In the U.K. net borrowing reached a peak of 6.1% early this year.
But Canadian numbers are easily comparable. Canadian households moved into sustained deficit in 2002. The deficit grew to an average 6.3% in 2007 and in the first quarter of this year it reached 6.4%.
Judging from the massive outperformance of Canadian bank shares through the global crisis the market view is that that Canadian housing and credit markets are not going to crack, that somehow household overextention is somehow more sustainable in Canada, Mr. Wolf said.
"We fear, however, it may simply be a matter of time," he said.
The tipping point in the United States was the emergence of falling house prices in the summer of 2006, kicking off the "vicious" circles that have brought the financial system to the brink.
Canadian house prices are now beginning to fall, yet mortgage debt continues to grow at a double-digit pace.
"From this perspective, the absence of a Canadian credit crunch to date may be cause for concern, not comfort," Mr. Wolf said.
Yes, it is true. Canadians are in hock up to their eyeballs and we are no different from most of our counterparts in the rest of the western world. We have plenty of problems here in Canada so we need not try to pick out the specks in other people's eyes until we remove the log in our own.