For most of the past six years, the Canadian dollar (CAD) closely tracked movements in West Texas Intermediate (WTI) crude oil. But from mid-2016, CAD began diverging, underperforming WTI significantly (Fig.1).

And the parting of ways was not the result of a generally stronger US dollar (USD). The Russian ruble, which also correlates highly with oil prices, has outperformed WTI over the same period (Fig.2). Both Canada and Russia are major producers of crude oil. CAD’s divergence from oil may have to do with deeper economic problems: the country’s extremely high levels of debt and overvalued real estate prices.

From 2007 to 2009, the United States underwent a period of reckoning as the real estate bubble popped, banks failed and unemployment soared from 4.4% to 10%. North of the US border, Canadians suffered as well but to a much lesser extent. Unemployment rose, but only by half as much as in the United States.

(Fig.3) and real estate prices never collapsed (Fig.4). From the peak in 2006, US real estate prices fell 30% before rebounding. Still, US residential real estate prices remain a few percent below their peak. By contrast, Canadian real estate prices are more than 30% higher today than they were in 2006 and certain property markets in Canada, notably in Toronto, may be experiencing significant real estate bubbles.