There is an acute interconnectedness between psychology and economics. Every now and then it is worth one’s while to step back and try to parse out what is merely “psychological economics” from the more “fundamental” economics of quantifiable numbers, indicators and trends. This is the position Canada’s Finance Minister, Jim Flaherty took in a speech he gave to assembled analysts and reporters on May 12, 2008, stressing “fundamental” differences he sees between the state of the Canadian mortgages and real estate markets and those in the United States.

Highlighting what he called “a steady drumbeat of negative media coverage on the state of the U.S. economy,” Mr. Flaherty wasted no time in trying to distinguish the psychological angst that Canadians are likely experiencing from the continuing hiss of news coverage that tracks the continuing deflation of the speculative housing bubble and the melt-down of the U.S. sub-prime mortgages marketsoth-of-the-border. Mr. Flaherty’s position, essentially, is that continuing media coverage on both sides of the Canada-U.S. border contributes unnecessarily to a psychological concern on the part of Canadians that is not justified by the economic fundamentals of Canada’s housing and mortgages market.

I think,” Mr. Flaherty said, “this spills over into Canadian readership and influence on Canadians.” No matter the political leanings of astute observers of the Canadian political or cultural milieu, they would likely concede that the Finance Minister is correct in assessing how deeply Canadians’ psychology is affected by what it sees and hears in the media about what is going on in the States. Canadians have learned to closely study events and trends in the U.S., with both an optimistic and wary eye cast over the world’s longest undefended – for now- border at the issues that are affecting our biggest trading partner and closest political friend.

”Often when you pick up a newspaper, economic forecasts are being adjusted downwards,” Mr. Flaherty observed (as reported by Les Whittington in the Business Section of the Toronto Star). “And certainly there’s been a psychological effect of the recession in the U.S. housing sector.”

But how much of this negative psychological effect that has seemingly slowed growth in the Canadian residential real estate sector has been caused by the angst we naturally feel as we watch our American cousins struggle as they plunge into recession, and how much is caused by looking at the fundamentals of our mortgages market, of our housing market? And there’s the rub. . . .

Economics, like psychology, for all its vaunted formulae, trends and tracking methodologies, is a social science – and the collective cultural psychology of Canadians affects the Canadian mortgages and housing markets perhaps more than any other sector of the economy. Our homes are near and dear to us. This is why Mr. Flaherty was at pains to stress the more quantifiable “fundamentals” of Canada’s housing and real estate markets. In doing so, he stressed the differences that he sees as distinguishin us and our situation from them and their housing woes:

- Canada has, according to Mr. Flaherty, “the strongest economic fundamental of all of the major industrialized countries” in the G7 – with near record-low unemployment, very moderate consumer-price inflation, and balanced budgets more-or-less consistently being brought forward by federal and provincial governments alike.

- Canada has so far shown great resilience and buoyancy in the face of the collapse of the U.S. housing market brought on by the sub-prime mortgage meltdown, a Canadian dollar that is more-or-less at par with the U.S. dollar for the first time since the then-first oil shocks of the mid-1970s, and stiffer-than-ever manufacturing competition from overseas. (It helps tremendously that Canada has vast oil and gas resources that sustain our energy sector.)

- Moreover banks, financial institutions and Canadian mortgage brokers have been better able to weather what quickly became a global credit crunch in no large measure due to Canada’s more conservative, risk-adverse institutional and regulatory framework.

That’s Mr. Flaherty’s essential argument for why Canadian investors, homeowners and prospective homebuyers should maintain their continuing confidence in Canadian mortgages and real estate markets. Whether the Finance Minister’s assessment of “market fundamentals” versus “market psychology” is correct is perhaps the heart of the question as to how well Canadians will weather the choppy seas being churned up by the financial storms they see blowing on their southern border, and it is this question that compelled Mr. Flaherty’s speech to the gathered media,

As a former lawyer, I know that it rarely if ever possible to prove any truth beyond all doubt. Only time will tell, as the adage goes. But in law school, my most respected and “Paper-Chase-ish” professor noted, “You can always tell the truth, because it has the ring of truth to it.” Mr. Flaherty’s analysis of key fundamental differences between the Canadian and U.S. housing and mortgages markets rings true.

The bells that Canadians can now hear clanging are more likely those on the buoys that are rising and falling with the sea change in economic fundamentals south-of-the-border. Canadians investigating their home purchasing or home refinancing options need not unnecessarily interpret what they hear and see as alarm bells, however – although that may be Canadians’ fundamental “psychological” propensity, given the close cultural and emotional ties Canadians have to their U.S. cousins.