THE ALARM BELLS
We knew it was bad, but we didn't know it was this bad.
The American housing slump keeps getting deeper, and policy makers and economists are scrambling everywhere to slash their numbers and lower expectations.
U.S. Treasury Secretary Henry Paulson, Federal Reserve Board chairman Ben Bernanke, the Bank of Canada and the International Monetary Fund all rang alarm bells this week about the depth of the problems in the U.S. housing sector, and warned about widespread, sustained effects in the North American economy.
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"The contraction in the housing sector is transitioning from an average downturn to among the worst in the post-World War II history of the U.S. economy," says Michael Gregory, senior economist at BMO Nesbitt Burns. "As the current downturn probes deeper depths, the risk of outright [gross domestic product] recession will mount." The data tell a painful story.
Housing starts plunged 10.2 per cent in September, and building permits fell 7.3 per cent - both at their lowest points in 14 years. The National Association of Home Builders' activity index, which acts as a bit of a leading indicator of construction activity, is at its lowest in 22 years.
At the same time, declines in demand are outpacing the efforts to reduce supply. Home sales are down significantly. Inventories are rising, credit is harder to get, and demand is likely to dwindle further.IS CANADA AT RISK?
As Mr. Paulson suggested this week, the problems in the housing sector are quickly becoming entrenched problems in the financial system. And Canada, as the central bank and IMF point out, is quite vulnerable.
The worst-case scenario, Mr. Gregory says, is that the U.S. housing recession becomes a general recession, and spills over the border, snuffing out Canadian domestic demand - the main engine of the Canadian economy right now.
"Canada very quickly could have near-recession outcomes as well," he said.
The worst-case scenario isn't the most likely outcome, economists say. But they're watching closely.
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