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Paul Krugman (MIKE CLARKE/Mike Clarke/AFP/Getty Images)
Paul Krugman (MIKE CLARKE/Mike Clarke/AFP/Getty Images)

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Paul Krugman: 'Canadians borrow an awful lot' Add to ...

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Krugman warns Canada Noted economist Paul Krugman praises Canada's economy and the soundness of its financial system, but warns the country isn't immune and shouldn't be complacent. The Nobel laureate said Canadians cannot be complacent in the face of disturbingly bleak global conditions, because they spend too much relative to their household incomes and the country's housing sector has yet to burst. Canadian housing prices did not take off in the mid-2000s the way they did in the United States and Europe, Mr. Krugman said, but neither did they come down sharply during the recession, as they did elsewhere in the Western world. These issues aren't scary but they are "disturbing," he told the Canadian Bar Association yesterday.

"Canada is by no means insulated," he said. "Canadians borrow an awful lot. Savings rates have been very low. Household debt relative to income is very high here."

House prices forecast to sink further Canada's housing market is sinking, as expected, having surged in the first half of the year as real estate staged a spectacular post-recession comeback. Sales of existing homes fell 30 per cent in July from a year earlier, driven by slowdowns in Ontario and B.C., though the average resale price was still 1 per cent higher, the Canadian Real Estate Association said today. Month over month, the average price dipped 3.5 per cent.

"While the softening in sales is very real, we continue to view it as a giveback (a big giveback, admittedly) to the surge in sales in the first half of the year," said BMO Nesbitt Burns deputy chief economist Douglas Porter. "Anyone who wanted to buy a home this year seems to have done so already."

Mr. Porter said that while the downturn has been deeper than most expected, "I think the main message is that anybody who wanted to buy this year bought in the first half of the year." That was due to warnings that interest rates would rise and the coming of the harmonized sales tax in B.C. and Ontario. With rates still low, and the labour market still sturdy, he does not expect a marked decline going forward.

Economist Grant Bishop of Toronto-Dominion Bank, stressing that Canada's dip isn't a U.S.-style crash, said he expects prices to sink more through next year and then stagnate for several years, moving in line with inflation. Since the peak in February, Mr. Bishop said, the average price in Canada has declined by 5 per cent, and he expects a further 5-per-cent dip by mid-2011. There will probably be a modest rebound in 2012, though not more than around the 3-per-cent range, he added, followed by inflation-level increases for years. Household debt and debt-servicing levels in Canada, Mr. Bishop said, point to slower sales and prices because of what Canadian buyers can handle.

"The excessive pricing of Canadian housing in relation to fundamentals is now clearly correcting, and we expect a moderate contraction in prices over the coming year," he said. "Affordability was steadily eroded during the house price surge of late 2009 and early 2010, with carrying costs on a standard mortgage on an average priced home rising relative to average household incomes. The current level of household debt flags the need for households to slow their borrowing, and, coupled with tightened standards for mortgage insurance, this has necessarily slowed homebuying. With housing 10-15 per cent overpriced, we expect a downward correction of nearly 10 per cent in the monthly average prices, followed by several years of stagnation of price growth at the rate of inflation, in order to bring Canadian house prices back to balance."

China, India on the rise Faltering growth in Japan in the second quarter - GDP rose just 0.1 per cent or 0.4 per cent annualized - means China is now the world's second-largest economy behind the U.S. That's not surprising but it does symbolize the stunning emergence of China as one of the world's economic superpowers. China's economy is now $1.33-trillion (U.S.), marginally ahead of Japan's $1.28-trillion.

China is part of the so-called BRIC group of emerging economies that also includes Brazil, Russia and India. And as China takes its place in a new world economic order, so does India. In a report titled India and China: New Tigers of Asia, Part III, Morgan Stanley economists projected today that India could surpass China as the fastest growing major economy in the world by 2015, Bloomberg News said.

China's ascendancy, however, is being measured strictly by the size of its economy, but it still has a ways to go in terms of living standards, Scotia Capital noted today.

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  • Updated July 24 12:31 PM EDT. Delayed by at least 15 minutes.

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