Canadian housing investment is swallowing the whole darn economy. Statistics Canada (Stat Can) data shows residential investment is at a record high in Q1 2021. The recent housing boom has allowed the segment to grow much faster than gross domestic product (GDP). Consequently, it now represents a much larger portion of the Canadian economy. The country is now 50% more dependent on housing than the US bubble in 2006.
Residential investment is real estate’s direct contribution to GDP, but not the total. Canada’s numbers include the construction of homes, significant renovations, and ownership transfer costs. A few industries are related but in their own categories. For example, insurance and finance.
Residential investment needs to strike the right balance compared to GDP. If growth is too low, it may mean there is a lack of confidence in the economy, and regions are stagnating. This is typical of a recessionary environment.
When growth is too high, it can be a sign of excess, and means capital is misallocated. This tends to happen when money is cheap, and has few other places in the economy to land. Both are bad news, but overallocation can mean a shock when it is corrected. As was the case in the US, during the Great Recession.
Canadian Residential Investment Hits $248 Billion
Canadian residential investment is moving so fast, you won’t be able to hear the noise it made for a few months. The seasonally adjusted annual rate (SAAR) in current dollars hit $247.9 billion in Q1 2021. This is 15.1% higher than the previous quarter, and a whopping 42.4% higher than last year. Some might assume this is a base effect, but there’s surprisingly little evidence of that.
Canadian Residential InvestmentThe seasonally adjusted annual rate of Canadian residential investment in current dollars. Source: StatCan; Better Dwelling.
The first quarter of 2020 showed a minimal impact due to the pandemic. It was the same size as the quarter that preceded it, and much larger than a year before. This is just straight-up exuberance for real estate investment. It’s such a big number, it’s kind of hard to comprehend unless you have a knack for numbers. If it helps, it’s about the size of New Zealand’s whole GDP. An astronomical amount of money has been dumped into this area.
Canada Is 50% More Dependent On Housing The US At Peak Bubble
The size isn’t just large compared to New Zealand, it’s a large amount of capital for Canada. SAAR residential investment is now 10.3% of GDP in Q1 2021, up from 9.3% in the previous quarter. The ratio had hit 7.68% about a year ago. Last year it was a massive amount of GDP. Now it’s over one in ten dollars in the economy, and it doesn’t capture all of real estate’s contribution to GDP.
Canadian Residential Investment As A Percent of GDPCanadian residential investment expressed as a percent of GDP. Source: StatCan; Better Dwelling.
It may actually be difficult to find an economy that’s more dependent on real estate than Canada. Experts flagged the US as it breached the 5% level before the housing crisis. The US ultimately peaked at 6.7% in 2006, before a hitch derailed the economy. Right now, Canada is 50% more dependent on residential investment.
That isn’t to say Canada can’t see this number go higher, or will suffer from a correction. Residential investment can continue to move for as long as it can find new capital. The issue is, as it rises it slows economic growth, and misallocates more capital. Finding a way to correct that becomes more and more difficult. It also increases the size of shock that a housing correction can cause.
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