The economist who says Canada is headed for a credit crisis

Professor Steve Keen, of Kingston University in Greater London’s western suburbs, has made a name for himself as one of economics’ leading contrarian voices. He has criticized the idea that no one could have seen the 2008 global financial crisis coming as “balderdash“. He was one of the relatively few economists to favour Britain leaving the European Union; and perhaps less controversially, he sees the common European currency as “destroying Europe” and as something which “should never have started in the first place.

But Keen foresees problems in more places than just Europe. In an interview broadcast in late September on RT, the Russian government’s foray into 24-hour cable TV news, Keen discussed the rising risk of a debt crisis in China caused by the over-construction of new housing and office space. As he sees it, private debt and demand for credit has reached hazardous levels:

“The potential trigger is simply the level of private debt. Anything above 1.5 times GDP is enough to put you in the range where changes in credit have a large impact on your demand. Secondly, if your credit demand exceeds 10 percent of GDP, you’re in danger territory again, because, simply, stabilization of that rate of growth of credit, so that it grows at the same rate of GDP, will mean a fall in total demand in those economies.”

The more disturbing part of the interview comes when Keen sets his sights firmly on Canada:

“The most vulnerable economy apart from China on that front appears to be, of all things, Ireland — again! They’ve got themselves back in the situation; but that may involve their dodgy accounting and their dodgy tax records. But certainly Canada. Canada is the western developed economy that I think is most exposed to a credit crisis, and indeed using a different metric, that’s the country that the BIS [the Bank for International Settlements; a Swiss-based banking institution for the world’s central banks] identifies as the most likely one to face a credit crunch.”

Indeed, news watchers might have noticed that just this past week the Canada Mortgage and Housing Corporation (CMHC) issued its first-ever “red warning” for the Canadian housing market, noting that “high levels of indebtedness coupled with elevated house prices are often followed by economic contractions . . . The conditions we now observe in Canada concern us.”

One glimmer of hope that Keen sees for Canada is that the federal government’s deficit spending might turn out to be a good thing, by diluting the impact of any shock that comes along. Yet he also sees some risk from the possibility that those deficits might come under attack for political reasons:

“What worries me of course is when that credit crunch occurs, the political opponents to Trudeau will blame it on his deficit spending. But his deficit spending is one thing that’s attenuating how bad that shock is going to be. So, Canada definitely, Australia, Sweden, Norway, possibly Switzerland, there’s about 17 countries . . . but those are the major ones [facing a problem].”


Winnipeg’s Housing Market: Out of balance, nice and tight, or vulnerable to rate shocks?

If you’re looking for a home or even thinking about buying, a recent report by the Edward Jones investment firm might have caught your eye. It contained some jarring news: that Canada is starting to show some of the signs of being in a housing bubble.

Other reports, however, might have helped put you at ease. For example, Edmonton Journal business columnist Gary Lamphier wrote on Tuesday that the fears of a housing bubble — in which home prices soar into the stratosphere, seemingly disconnected from reality — are really only valid for three overheated markets: Vancouver, Victoria and Toronto.

Discouraged by the fact that houses in Elmwood are now selling at what would have been considered River Heights prices 10 years ago? This might be more in your price range: $89 plus shipping!

Discouraged by the fact that houses in Elmwood are now selling at what would have been considered River Heights prices 10 years ago? This might be more in your price range: $89 plus shipping!

What about Winnipeg, where even houses on the tough streets of Winnipeg’s North End are now selling for $100,000 or more?

Here’s what three observers from outside of Winnipeg had to say:

  • The most cautionary note comes from Tsur Somerville and Kitson Swann of the Sauder School of Business at the University of British Columbia. Their 2008 analysis, based on how much the average house price would have to change to bring the rent/price ratio into line with a ratio that would be indicative of a balanced housing market, suggested that Winnipeg was a “very unbalanced” market. In their view, the average house price in Winnipeg would have to drop by 25 percent in order to restore equilibrium. Interestingly (or perversely) enough, Winnipeg was seen as being more unbalanced than Calgary, Edmonton or Vancouver; and Toronto was considered a balanced market.


  • TD Economics offered a somewhat more positive take on the Winnipeg market in an October 2009 report. Their analysis concluded that Winnipeg was one of the more tightly balanced markets in Canada, and thus “in a position to outperform most other markets in terms of resale home price performance”. While TD Economics did not forecast a drop in housing prices, they did expect that prices would increase by only six percent in 2010 (versus double-digit gains in previous years) followed by a modest 1.8-percent rise in 2011 due to increased slack in the market and higher interest rates.