As oil prices continue to hover around $40 a barrel, and the unemployment rate creeps higher each month, a correction in the Alberta housing market is in full swing. In Calgary, home sales are down 28% and home prices have dropped 5% from November 2014. In Fort McMurray, home sale prices have dropped more than $117,000. Canadian Mortgage and Housing chief executive Evan Sidell recently stated that if oil prices stay near the $35/barrel mark for 5 years, provinces like Alberta could experience a catastrophic collapse in house prices on the scale of the housing crisis that occurred in the United States 7 years ago.
This comparison to the U.S. housing crisis is valid if you consider conditions in provinces like Alberta. Many attribute the crisis to deregulated financial markets and shoddy lending practices that contributed to defaults on sub-prime mortgages causing insolvency in the banking sector. But too often people forget to ask why mortgage defaults occurred in the first place. At the centre of the crisis was the accumulation of unsustainable levels of debt and record high levels of wealth inequality (Bartolini et al. 2014; De Vogli and Owusu 2015). This changed behavior among consumers, enough of whom decided to spend less and pay off debt, while others could not simply keep up with interest payments and defaulted. This quickly spiraled into a cycle of unemployment, mortgage defaults and home foreclosures in certain regions. These downward spirals spilled over into other regions. Deregulated financial markets transformed the housing crisis into a banking crisis.
Canadians, and Albertans in particular, should not act as if we are immune to this scenario. Household debt levels are at a record high in Canada. Moreover, households in Alberta have been found to be particularly vulnerable to a major economic shock. It is no longer possible to claim our banking rules and mortgage markets are better regulated as major Canadian mortgage lenders are now under investigation. As the repercussions of the oil glut reverberate through the Alberta economy an economic contraction not unlike that which occurred in the United States remains a real possibility.
Bartolini, S. Bonatti, L. and Sarracino, F. 2014. The great recession and the bulimia of US consumers: deep causes and possible ways out. Cambridge Journal of Economics, 38, 1015-1042
De Vogli, R. and Owusu, J. 2015. The causes and health effects of the Great Recession: from neoliberalism to ‘healthy de-growth.’ Critical Public Health, 25(1), 15-31