Who needs businesses when your homes are making so much money? BMO chief economist Douglas Porter crunched residential investment data for Q1 2021. The bank found residential investment now represents a record share of Canada’s GDP. It’s now such a large share of GDP, more investment capital is going into housing than businesses.
Canadian Housing Investment Reached A Record Share of GDP
We already discussed residential investment earlier this morning, but for those that missed it — it made a huge leap. The segment hit a record 10.3% of nominal GDP in Q1 2021, almost jumping more than 2 points in the previous quarter. BMO calculations show it printed unsustainably high growth at a 43% annualized rate.
“That’s way above pre-pandemic trends, which were already lofty, and compares with a long-run norm of less than 6% of GDP,” said Porter.
Business Investment Reached A Record Low
That capital appears to be diverted from business investment, which is now at a record low share of GDP. Business investment in this case is a combination of non-residential structures, machinery & equipment, and intellectual property. Together, these add up to 9.3% of GDP in Q1 2021. This is a record low compared to the long-run average of 12% of GDP, according to the economist.
“This is the first time on record that more resources were devoted to residential construction than business investment,” he said.
Both levels are likely to be temporary in his opinion. Residential investment should fall as housing activity tapers. Business investment is also likely to rise as the economy reopens. “But the fact they are even close is astonishing,” he said.
It may be likely to correct in the near future, but the situation is far from normal. The bank’s data shows US residential investment at 4.8% of GDP, and non-residential investment at 13.4% in the same quarter. A totally different economy that Canadian investors would likely find unrecognizable.
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