Canada

Canada Is Now 50% More Dependent On Housing Than The US At Peak Bubble

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 

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 Investment

The 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 GDP

Canadian 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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11 Comments

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  • Probably Your Real Estate Agent 2 weeks ago

    Psh, it’s just fundamentals. Those don’t matter.

  • Trader Jim 2 weeks ago

    LOL! Chart looks like nice and healthy growth. What can go wrong?

    • Doomcouver 2 weeks ago

      It’s the first one-way bet in the history of assets. I should be buying 6 condos right now……

  • Jonathan 2 weeks ago

    Residential investment can continue to move for as long as it can find new capital.

    Sounds like a Ponzi scheme…

    • Charles Ponzi 2 weeks ago

      The real estate industry prefers the term triangle plan over ponzi scheme.

    • Sam 2 weeks ago

      A Ponzi scheme where the schemers run out of patsies to fuel the scheme so they become the patsies to fuel their own scheme….and the government insures that they are covered.

      • Doomcouver 2 weeks ago

        The government will cover the banks. The chump homebuyers that thought the federal government would have their backs can twist in the wind as far as the feds are concerned.

  • Ottawa Resident 2 weeks ago

    You’re joking, but how many times have I read that in news articles? I wouldn’t be surprised. Nothing matters except for inflation, which is now higher than the target, but they’re pretty sure it’s fine.

    • Doomcouver 2 weeks ago

      Central banks are hoping desperately for a pullback in inflation post-pandemic. I’m of the opinion the high inflation is mostly permanent though thanks to the massive expansion in the money supply. One likely outcome is when it’s still high in Q3 2021 the Federal Reserve will freak out and jack up rates to try and pull down inflation. Increases in rates won’t easily translate into lower inflation in all relevant metrics though because it’s calculated on monthly payments on housing, and they would go up if central bank rate policy increases mortgage rates, so they’ll have to jack up rates pretty hard to pull in all their inflation measures.

  • Average Man 2 weeks ago

    Should we be worrying about this? It feels like we should be worrying.

  • Bloemie 2 weeks ago

    I get the argument that any calming of the housing market, could cause a major recession. It clear now though, that housing has now become Canada’s barrier to economic growth and no amount of QE will fix the lack of investment and stimulate the economy till they do. If the Gov’s grand plan is to waist hundreds of billions in stimulus, drive up debt and make house prices less affordable, for their voters they doing the right thing! Until they “stimulus” drives real investments though, there is no real growth, and clearly harm

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