Canadians Struggling Despite Economic Boom
You know Canada's ECONOMY is on a tear when house prices in Saskatoon skyrocket nearly 50 per cent in six months; when even northern outposts like Sudbury, Ont., are joining in the real estate mania; when former New Brunswick premier Frank McKenna heralds that province, with its suddenly robust job market, as "Alberta with a view"; and when, back in the land where it all started, folks in Fort McMurray, Alta., still can't find anyone willing to dress up as mascot Buddy the Buffalo for $25 an hour.
The boom is on. With each stunning economic announcement, analysts and business journalists have had to reach further back in time for cultural touchstones to illustrate just how great the country is doing. Was it Joe Clark or Pierre Trudeau who was prime minister last time the dollar was this high and unemployment so low? Suffice to say it's been 30 years since Canada looked this good. Jobs are plentiful while more and more economists are predicting the unthinkable - that the loonie could reach parity with the U.S. greenback by year's end. On the world stage, Canada's vast bounty of natural resources is fuelling an epic-scale global expansion.
When U.S. President George W. Bush declared last year that America is addicted to oil, he might as well have called Canada its main pusher for the 2.5 million barrels of petroleum we ship across the border each day. As tens of millions of Chinese march up the ladder into middle class, that country has come to rely heavily on the copper and zinc gouged from below the Canadian Shield. And growing nations everywhere lust hungrily for the oil being dug out of Alberta sands. Add it up, and Canada's net worth reached an all-time high of $4.9 trillion earlier this year, or $150,500 for every man, woman and child.
So why, then, do we feel so poor? The boom has undoubtedly made Canadians better off on paper, but for many people it has failed to translate into any real sense of affluence. For one thing, many of the factors that have benefited the Canadian economy have turned around and hit consumers squarely in the pocketbook. Oil exports may be on the rise, but for regular Canadians, that means gasoline prices are up, too. And despite what the statisticians tell us about the country's soaring gross domestic product, many of us just feel grossly underpaid. The gains simply haven't trickled down from the oil wells and frothy real estate listings. If anything, we're having to borrow more just to keep up, creating a whole new burden as interest rates slowly edge higher.
Consider the average Canadian paycheque. For the vast majority of workers in this country, personal disposable incomes, while increasing, have failed to keep pace with economic growth during the boom years between 2002 and last year. Only workers in Alberta and Newfoundland have seen their per capita earnings grow faster than the provincial economies, and experts say what gains we have seen are only because more people are working. In fact, average hourly wages, adjusted for inflation, fell in Canada during the first five years of this decade, according to Statistics Canada, from $21.40 to $21.02. That's even been the case in Canada's most overheated market. "The majority of Albertans don't feel they're benefiting from the boom," says Diana Gibson, research director with the Parkland Institute at the University of Alberta. "The growth hasn't translated into real income growth for families. The bulk of that money has gone into corporate equity."
When you ask Canadians, they certainly don't feel like they're any better off as a result of the soaring economy. Quite the opposite. Poll after poll shows Albertans, especially those in Calgary, feel their living standards have deteriorated over the last five years. Long waits for taxis, crummy service in restaurants and brutal congestion have left Calgarians grumbling. Similar results come out of other cities. A study just released by the Canada West Foundation found people in several major cities feel their quality of life has either stayed the same or worsened since 2002, with 64 per cent in Vancouver and nearly 70 per cent in Toronto saying they're no better off. "Too much of a good thing can be just as bad as not enough," says Craig Alexander, deputy chief economist at TD Economics. "In an ideal world what you want is a strong economy that is growing at a good pace, that's creating lots of jobs, but isn't creating its own set of problems."
For now, the economy is creating plenty of both. Soaring demand for commodities is the driving force behind Canada's economic miracle, earning billions for the country's exploration companies and stuffing government coffers in the West. For everyone else, though, the benefits are shrouded in higher prices. Take, for instance, record oil prices. Rig hands and oil executives may be rolling in it thanks to the world's hunger for crude, but for most consumers that just means more pain at the pumps. The average price of a litre of gasoline in Canada recently topped $1.15, according to MJ Ervin & Associates in Calgary, up 72.8 per cent from five years ago. Canadian drivers haven't had it quite as bad as their counterparts in the United States. The high Canadian dollar has meant gasoline prices have risen at just half the rate as in the U.S., according to a recent report by Statistics Canada. But that comes as cold comfort for those who've seen the cost of commuting skyrocket over the past three years.
Driven by rising commodity prices, "gasoline and electricity rates have gone up way faster than inflation and incomes," says Jeffrey Gandz, a professor with the Richard Ivey School of Business at the University of Western Ontario. "Those are the things people are paying for out of their pockets, the $100 fill-up." A survey by Royal LePage recently found a quarter of Canadian cottage-owners are cutting back on the number of trips to their vacation homes because of pump prices, while many are thinking of getting rid of their cottages altogether should the cost of a tank of gas continue to rise.
Meanwhile, higher energy costs are catching up to us at the dinner table too, as the cost of transporting food gets passed along to grocery consumers. As oil prices soar, alternative fuels like ethanol, made from wheat and corn, look more attractive. As new ethanol distilleries come online, that is driving up the prices of the ingredients of your Corn Flakes and bread.
It's the same story across the board with other commodities. Shopped for a gold ring lately? Canadian gold miners have seen the price of the shiny metal soar 140 per cent since 2001, and jewellers have passed some of that cost on to consumers. Concrete may lack the lustre of gold, but with China and India furiously building bridges and overpasses, analysts suggest that's given Canadian producers a boost but also driven up the cost of home building and renovation. And anyone who has tried to hire a contractor in major cities has seen first-hand what the building boom has done for construction costs. It seems everywhere we turn, higher commodity prices for metals are forcing us to fork out more cash, for everything from copper piping to the kitchen sink. "We're all paying more for stainless-steel sinks then we would have a few years ago," says Robert Fairholm, the director of Canadian Economic Forecasting Services for the Milton, Ont.-based Centre for Spatial Economics. "Those people who are renovating are going to be paying an awful lot more today than they would have a number of years ago because a lot of those materials have gone up in price and the demand for labour in that sector is so hot. Makes me wonder why I'm renovating my kitchen right now."
But the stuff being pulled out of the ground is only part of what's driving the Canadian economy. The other big factor is what we're building on top of it. From coast to coast, the real estate market has seen unprecedented growth over the last few years. That's led to all sorts of unbelievable prices. For instance, a dilapidated townhouse in Vancouver's west end with droopy siding and boarded up windows recently went on the market for $1 million. And while Calgary had cornered the market on outrageous bidding wars last year, now it's Saskatchewan's turn. One 1,200-sq.-foot bungalow in the north end of Saskatoon recently listed at $319,900. After just three days and 11 rapid-fire bids, it sold for $370,000. "The Saskatoon market has performed better than it ever has, if you consider fast sales and crazy prices as a good thing," says Norm Fisher, a broker with Royal LePage.
But even though property values are on the rise, that doesn't mean Canadian homeowners necessarily feel any richer. "For someone who is in a house today, their wealth is increasing and that means they're house-rich, but they can't immediately access that money," says Tsur Somerville, associate professor of urban economics at Sauder School of Business at the University of British Columbia. Homeowners can borrow against the equity in their home, if they have any, but that just means facing an even larger mountain of debt. "That means they can't move up the housing ladder."
Pity those people hoping to buy their first home. In much the same way drivers are left feeling poorer when watching gasoline prices soar higher, today's exploding housing market is enough to leave prospective homebuyers feeling like paupers. "Even if you're making a good living, if your first home is going to cost you $500,000 it eats up that extra money you're making," says Brett Gartner, an economist with the Canada West Foundation. Just look at Royal Bank of Canada's housing affordability index, which measures the share of household income taken up by home ownership costs, including mounting property taxes, and you'll see just how out of reach a new home is in some parts of the country. Homes have gotten steadily less affordable everywhere since 2000 - in Toronto a two-storey home now consumes nearly half of household income, while Vancouverites fork over as much as three-quarters of their earnings to own and maintain a home.
No wonder a recent Léger Marketing poll of residents in Calgary, where home ownership costs as a share of household income have soared 50 per cent in the last year alone, shows eight out of 10 people feel the boom has made home ownership more difficult. Many fully employed Calgarians have been forced to live in homeless shelters because soaring real estate prices and minuscule vacancy rates have driven up rents as much as 300 per cent overnight.
Short of winning the lottery, or having rich in-laws, the only way most Canadians can join the go-go real estate boom is by assuming a huge debt, sucking up whatever spare money they have. And with historically low interest rates, people in this country have been piling it on like never before, racking up a total of nearly $1 trillion in personal debt, up nearly 90 per cent from a decade ago. Mortgages account for roughly two-thirds of that amount. "I hear the advertising on the radio - consolidate your loans, go to a 40-year mortgage with low, low rates - they're just begging people to get in right up to their eyeballs," says Ron Cirotto, a mortgage consultant in Burlington, Ont., who operates Amortization.com. "People will have these mortgages hanging over them into retirement. It's ludicrous."
But the dirt-cheap interest rates that have drawn so many into debt are on the rise, and that is putting the squeeze on people, say credit counsellors. Scott Hannah, president of the Vancouver-based Credit Counselling Society, which serves the four westernmost provinces, says demand for counselling services are up 20 per cent over last year. "Now that the real estate market is not quite as active, people are saying 'wait a minute, I've got all this debt I have to refinance,' " he says. "With rates progressively creeping up, I think we'll see a lot more people struggling to keep up." No one expects lenders to start charging the crushing rates they did in the 1980s, when some mortgages carried 20 per cent interest. But the Bank of Canada is expected to jack rates again next month to cool the overheating economy and tether the strong loonie.
And while the soaring dollar has paid off in a big way for Canadian travellers, any savings on that weekend getaway to Vegas are swallowed up by the high prices that consumers are paying for many of our goods at home. Canadians spend considerably more than Americans do on a wide range of products. A couple of weeks ago, for instance, Champs Sports in Canada unveiled the new Nike Jordan Retro 1. It's a great-looking basketball shoe and for many fans of the NBA legend well worth the $159.99 price tag. But consider this: the exact same shoes at Champs in the States are only US$109.99. Factor in the exchange rate, and the baby blue and white leather high-tops - with an image of His Airness in mid-dunk emblazoned on the side - are a whopping 37 per cent more expensive north of the border. Bottom line: it costs a lot more in Canada to "Be Like Mike."
And it doesn't end there. A set of organic queen-sized sheets at Pottery Barn stores in the States sells for US$189 (or C$201.86). At Pottery Barn Canada it retails for $279. Wal-Mart sells a 50-ml bottle of Calvin Klein Obsession for Women in American stores for US$36.96 (or C$39.47). The same bottle at Wal-Mart Canada is $52. And a set of "teak-handle" grill tools at Williams-Sonoma are US$69 (C$73.69), but $99 north of the border.
This price gap isn't new, as any avid book or magazine consumer will tell you. But few of us paid much attention when the dollar was in free fall. The price difference didn't seem so far-fetched when we were carrying a 62-cent loonie in our pockets. But now, with the dollar having reached a 30-year high, many observers such as Bruce Cran, president of the Consumers' Association of Canada, are wondering when it's going to finally be reflected in the price of our goods.
Now for the really bad news: "It can take up to two years to see the impact of a stronger currency," says Avery Shenfeld, a senior economist at CIBC. He points out that the Canadian divisions of U.S. retailers purchased many of the items in question months before they appeared on shelves, and likely converted their Canadian dollars at a higher exchange rate. The benefit of the strong dollar on clothes, for instance, might not kick in until spring 2008.
There are of course many reasons sticker prices are higher north of the border. Retailers may have made poor hedging bets on where the loonie was headed, while higher operating costs, heftier taxes and less competition are all unfortunate facts of life that make goods more expensive in Canada. "A 10 per cent improvement in the Canadian dollar," says Shenfeld, "doesn't cut the retail price of an imported good by 10 per cent." If anything, some retailers, knowing that consumer behaviour is somewhat inelastic, are taking this opportunity to improve profit margins on imported goods.
This gap extends to big-ticket items as well. A study last year by DesRosiers Automotive Consultants found that the typical new car in Canada, when properly adjusted for the currency rate, was listed at $5,842 more here than in the U.S. According to analyst Dennis DesRosiers, it takes a while for fluctuations in the exchange rate to reflect in the list price. "[Manufacturers' suggested retail prices] are typically only changed once a year," he says. "At best, in six-month cycles."
The fact is, some car prices are not likely to come down in Canada any time soon. Take, for instance, the Lexus LS460. Americans can drive it off a lot it for US$61,000 (that's $65,155 in Canadian dollars). And yet, the same model in Canada is listed for $86,400. Dave Nichols, national manager of product planning and distribution for Toyota Canada, which distributes Lexus, says constantly responding to fluctuations in the exchange rate may anger current customers and create an unstable pricing environment. Instead, says Nichols, "we price for our market." Makes you wonder what that says about us.
Given all the hassles involved when Canadians buy cars in the U.S., we're pretty much stuck shopping for wheels within our own borders. Getting a new Range Rover across the Peace Bridge is a lot more complicated than taking a new winter coat or a pair of heels home to Canada from Macy's. But with the high dollar, expect many Canadians to put aside their terror fears and, armed with increased purchasing power, fill the parking lots of U.S. outlet malls at levels not seen since the early '90s. Others will save their time - and gas - by shopping online.
It's all in the name of coping with the boom. But before we get too carried away griping, there's something important to bear in mind. A strong economy may not be all it's cracked up to be, but the alternative is far, far worse. Just ask the people lined up at the soup kitchens in Windsor, Ont. Layoffs in the auto sector have thrown thousands out of work and given the city the highest unemployment rate in the country. Economists warn other manufacturing sectors are struggling, too. If nothing else, Windsor is a sobering reminder of what life is like in a downturn. Unfortunately, if and when things go bad, Canadians are likely to get stuck with a lot of the same problems they face today, but without the benefit of job security that a boom affords.
The economy is already showing signs of slower growth. Commodity prices are easing, which will cut into the earnings of the resource sector. Meanwhile, the high dollar has left many manufacturers holding on by their fingernails. As a result, Alexander expects the stock market to take a breather. "We're sort of overdue for a period of more subdued profit growth," he says. Such a slowdown will come as a shock to investors who have come to rely on double-digit gains to sustain their lifestyles in the face of rising prices.
Even Alberta, our economic star, may be in line for a substantial correction. Gartner predicts Alberta's economy is set to slow from last year's ferocious seven per cent growth to a more "manageable and healthy rate," around four per cent. But a soft landing is by no means guaranteed. The commodity market is susceptible to global conditions - a major slowdown in China or India would likely put our economy on ice.
Above all, it's Canada's tight labour market that has many economists most worried for the country's well-being. "It's not sustainable," says Fairholm. "We've had far too strong employment growth for our own good. At this rate, we're going to run out of employable people and basically cause a wage-inflation problem." He claims that the labour shortage has already taken its toll on some sectors. Companies in the Calgary oil patch are scaling back their exploration because labour costs are too high. Several firms have had to fly workers into Fort McMurray from other parts of the province to work shifts. "It's become uneconomic," says Fairholm. "Given the price of oil these days that's a pretty stunning statement."
The fear among economists is that the hangover from the wild party of the last few years will last well into the next downturn, even as inflation continues to take a bite out of our purchasing power. Canadians may not have seen any real income gains during the boom, but try negotiating for a raise during a slowdown. What we may soon learn is, the only thing worse than a boom is a bust.
The Canadian dollar is almost at par with the U.S. greenback and yet still we pay more for cars, shoes, even electronics
Teak-handle grill tools, Williams-Sonoma US$69 C$99
Sony Cyber-shot DSC-T100R, Sony.com/Sony.ca $399.99 $499.99
Rome Season 2, Amazon.com/Amazon.ca $64.99 $87.49
iPod Nano (8GB) $249 $299
Oakley Eyepatch sunglasses, Sunglass Hut $155 $230
Lexus $61,000 $86,400
Callaway HX Tour golf balls, Dicks Sporting Goods/Golf Town $39.99 $49.95
Organic sheet set (queen), Pottery Barn $189 $279
Relaxed cotton cargo khakis, Banana Republic $59.50 $80
Nike Jordan Retro 1, Champs Sports $109.99 $159.99
Calvin Klein Obsession for Women (50 ml), Wal-Mart $36.96 $52
The Time Traveler's Wife by A. Niffenegger, Barnes and Noble/Chapters $14 $22
People magazine $3.49 $4.79
Nars lipstick, Sephora $23 $30
Billy Bookcase, IKEA $49.99 $69
Maclean's June 25, 2007