Reuters: “Canada is doomed” ?

Brett Gundlock, Reuters

You might be under the impression that everything is going pretty well in Canada, which had no banking collapse and only a mild recession in 2008-9.You would be wrong.

The country is beset by political corruption scandals of the sort that people focus on when the economy is good. But it also has a massive ongoing housing bubble, and its economy is being propped up by a global commodities boom that now shows signs of slowing.

Let’s break down the three ominous signs.

First, the scandals:

• Montreal Mayor Michael Applebaum got arrested this morning, charged with 14 counts including fraud and conspiracy. Applebaum was appointed to replace Gérald Tremblay, who resigned last year after getting caught up in a separate corruption scandal involving kickbacks from construction firms with alleged mafia links.
• Toronto Mayor Rob Ford may or may not be on video smoking crack; last week, Toronto and Ontario police raided an apartment complex linked to the alleged video and arrested 43 people, including two pictured with Ford in this photo.
• The mounties are investigating whether Prime Minister Stephen Harper’s former chief of staff, Nigel Wright, committed a crime when he gave a Conservative senator over $90,000 to pay back expenses that he had improperly claimed.
• London, Ontario Mayor Joe Fontana is under indictment for allegedly using public money to pay for his son’s wedding reception. London is the 11th largest city in Canada. Fontana is seeking re-election.
• Laval, Quebec mayor Alexandre Duplessis asked that his city, Canada’s 13th largest, be placed in receivership after “he and almost every sitting municipal politician in the city was linked to illegal political financing by a corruption-inquiry witness,” according to the National Post. His predecessor as mayor has been charged with two counts of “gangsterism.”
• Mississauga, Ontario Mayor Hazel McCallion was acquitted last week of conflict of interest. In 2007, she voted to reduce fees owed by a development company in which her son is a principal by $11 million. One of the defenses offered by McCallion, age 92, was that she did not read one of the relevant documents because she didn’t have her reading glasses. Mississauga, a suburb of Toronto, is the sixth largest city in Canada.
• Not all of the scandals are so serious. Winnipeg Mayor Sam Katz was recently acquitted of conflict of interest for his decision to host a city council Christmas party at a restaurant he owned. The judge said he showed “bad political judgment” but didn’t break the law. He also apologized in May after the Winnipeg Free Press called him out for littering.

Petty corruption undermines public confidence in government, though it’s also the sort of thing people focus on when the economy is healthy and they need something else to talk about. Are Canada’s municipal scandals a sign of underlying economic health?

Second, Canada has a big, brewing debt problem…

Paul Krugman argued over the weekend that Canada may not be as economically secure as it looks. Canada’s relatively easy time with the global economic crisis is often credited to its highly-regulated banking system. But Krugman argues that the big problem in the U.S. was not the banking crisis but the bursting of the real estate bubble and the huge overhang of household debt that it caused.

The Economist

Home prices in Canada are now double what they were in the 1970s in real terms. Historically, over the very long term, real home prices tend to be flat.

Krugman argues:

So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

And third, one of the big factors that has allowed Canada’s house prices to stay inflated may be coming to an end. As an oil exporter, Canada has been one of the big beneficiaries of the global commodity boom.

Business Insider, data from Industry Canada

In 2012, Canada exported mineral oil, fuel and wax products and bituminous substances worth nearly $120 billion (USD), up from $20 billion in 1990 on an inflation-adjusted basis. Petrodollars have been raising Canadian incomes and allowing the country’s residents to bid up home prices.But as worldwide demand slows and the commodity boom wanes, Canada may be in for a home price bust — and bigger problems than municipal corruption.