One of the biggest business stories of 2010 was one that never happened: the disastrous Canadian housing bubble and crash that never came to pass.
Of course, we know this now. Canada's hot housing market has settled down without any serious slump in either prices or sales. It's hard to find a reputable analyst who predicts anything other than mild fluctuations in housing over the coming year or two.
But in the early months of the year, a superficial look at Canada's home values found them rocketing up at an unsustainable pace, making it frighteningly plausible that Canada could be headed into the same kind of disastrous real-estate bubble and meltdown that we saw right across the border.
And a superficial look is just what this issue got.
There was never a solid basis for the scary speculation, but it just kept bubbling up. Serious Canadian media, including the Globe and Mail, made housing-bubble headlines into a staple. Below the headline, there was usually an acknowledgment that there was no evidence of anything more than a hot market, but the scary headlines didn't stop.
Even big American newspapers that usually give Canada about as much coverage as Iceland became interested. The Wall Street Journal ran a front-page story in February under the headline "Housing rebound in Canada spurs talk of a new bubble."
Where was the talk coming from? The most prominently quoted source wasn't an economist or a real-estate expert ; it was Garth Turner, a former politician who had been promoting a book predicting a housing collapse.
A month later, the New York Times jumped in. "Some see a real-estate bubble forming in Canada," said the headline.
Like the Wall Street Journal piece, it was thin gruel. It didn't cite anybody who actually said there was a bubble, but did find one bank economist who speculated that if home prices kept shooting up rapidly for another year, a bubble would form -- although he didn't actually predict that this would happen.
The roots of bubble hysteria are understandable. After the terrible experience of the U.S., it made sense that many would be hypersensitive to any evidence that something equally disastrous could happen here.
What's not so understandable was that journalists working for some of the best newspapers in North America would give credence to such a hare-brained idea without finding any evidence that it was actually happening.
Canadian housing was clearly becoming overpriced early this year, but an overpriced market isn't the same thing as a bubble, as any competent economist is quick to explain. Overpricing is a perfectly normal thing in any market.
As investors become more or less optimistic, the price of an asset -- stocks, commodities or real estate -- constantly moves up and down. Sometimes it's too high and ripe for a fall, but that's not a bubble. And unlike stocks or commodities, homes are an asset that's resistant to big drops in value. Many owners are perfectly willing to wait if they don't get a satisfactory price.
A bubble, unlike a normal price cycle, is a rare phenomenon that occurs when over-optimism and price excesses last so long and become so extreme that a large number of people begin to believe that prices can only go up, never down. When this belief became entrenched in the U.S. six or seven years ago, investors and even ordinary wage earners turned into speculators, taking out loans they could never repay to load up on condos or tract homes. For a while, they made money, flipping these homes at ever-higher prices. But when the music stopped, they were wiped out and the market was so out of whack that it collapsed.
This kind of speculative bubble was allowed to form in the U.S. housing market through a combination of monetary policy that was too easy for too long and shockingly irresponsible regulation of banks, which enabled people to get mortgages they could never repay and allowed banks to package these bad mortgages into toxic securities that eventually shook the foundations of the banking industry in the U.S.
In Canada, nothing remotely like this happened.
True, the rock-bottom interest rates we used to fight the recession did cause a brief boom in housing sales, but that's normal.
Housing usually booms in response to very cheap money, which is why the authorities count on it to lead the way out of recessions. This time, with interest rates even lower than would be typical, the boom was exceptionally strong.
But we had no U.S.-style bubble and there was never much chance of one, because banking regulation here is conservative.
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