(Langley Advance Times files)

(Langley Advance Times files)

PAINFUL TRUTH: Back on the economic roller coaster

Property prices are going to be a little unstable, maybe for longer than we’d like

Today, Dec. 29, marks a fun anniversary – on this day in 1989, the Japanese Nikkei stock index hit its highest point before that country’s asset bubble began to really deflate.

I’ve been going back and reading articles and retrospectives about the Japanese bubble years during the last little while because, well, have you taken a look at our economy lately?

Now, the Japanese bubble was different in a lot of ways from what B.C., or Canada, or the developed world in general, has been going through in recent years.

But you’d have to clap both hands over your eyes to miss the similarities.

In broad strokes, this is what happened in Japan in the 1980s:

A country that was getting wealthier and wealthier from a large trade surplus, for various reasons, also slashed interest rates, while loosening up its financial controls.

This unleashed a torrent of speculation in property, especially in the biggest cities. This then led to fears of inflation, which in turn led to sharp increases in interest rates.

Lots of differences to our situation, of course, but it does rhyme.

And one thing was definitely the same – lots of people who should have known better insisted that the good times were here to stay forever.

They weren’t.

Starting in 1989, the Nikkei began trending down and it never quite recovered.

In 1991, property prices began to drop.

They didn’t start to rise again until around 2007, but they still aren’t back to anywhere near the peak. Considering that Japan’s population is shrinking, it’s doubtful they ever will, at least in real, inflation-adjusted terms.

So here in Canada and North America more generally, we’ve seen very low interest rates for years (which are now being raised at a shocking speed) a massive run-up in the stock market (which has been crumbling) and absurd housing valuations (which are now starting to erode).

So what happens next for Canada?

There are loads of differences between Canada now and Japan in the late 1980s, so even if we do seem to be entering an economic rough patch, it’ll play out differently.

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For one thing, we have a high immigration rate, which will help prop up demand for housing, at least for now.

But we are also an economy that is in massive transition already. Oil and gas are going to be much less important as economic drivers in 10 to 20 years. We’re reforming forest policy in B.C. Entertainment and technology are likely to keep growing in economic importance.

Where we end up is anyone’s guess.

In Japan, the economy suffered what they called the Lost Decade, then the Lost 20 Years, then the Lost 30 Years, as growth slowed to a crawl.

We also might see a long, sustained period of doldrums.

It should be a warning to us not to let our economy run white-hot, especially the real estate sector. But by the time it ends, we’ll probably have forgotten why that’s a bad idea.


Have a story tip? Email: matthew.claxton@langleyadvancetimes.com

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Bank of CanadaColumnJapanOpinionReal estate