Canada

Canada Now Dedicates More Investment Capital To Housing Than Business: BMO

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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19 Comments

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  • Kathleen Thomson 2 months ago

    I know it’s a joke, but what’s the average income for a self-employed individual in Canada? It can’t be more than $200,000. If you think housing is going to keep doing that, it’s a win-win. You buy a house, and don’t have to work. Make the same amount of money, and the government says they’ll guarantee your risk.

    • Liam 2 months ago

      Why work when you can buy a home and have it produce income bigger than your labor would likely produce, and the government gives you CERB/EI to make sure you have some pocket cash?

  • Rob 2 months ago

    In an economy where doctors and lawyers, and even politicians, are practicing being Realtors on the side, the incentive structure is totally broken.

    Canada doesn’t reward risk. It rewards inflation the assets those in charge control.

  • Pepp 2 months ago

    Yes, thats why we need to tax people who own multiple properties.
    That will discourage them from using housing as an “investment”.

    • Oops 2 months ago

      Clowns who disagree with this will watch as their country turns into a hollow financialized mess. It will be Monaco except without the cool sights and warm weather. And High taxes. So its basically an oxymoron.

      I pity the fools who think they can build wealth through being industrious entrepreneurs in this country. They can’t see the writing on the wall.

    • Joe B 2 months ago

      Agreed. But I don’t think government even has an interest in discouraging investment. That would likely trigger economic collapse which they would prefer happens in someone else’s term.

    • Gerry 2 months ago

      Home price gains should be taxed at the rate of regular investment income. It’s very clear many people move every couple of years to cash in on higher home price growth as a business stream.

      • Doi 2 months ago

        So when do they end up homeless but cash-rich? Every time you sell your home, you need to move to a cheaper place if you want to lock in that ‘profit’

      • Doomcouver 2 months ago

        Yeah the primary home tax exemption made more sense when homes weren’t an “investment”. With capital appreciation this high, the exemption is just incentivizing speculative mindset homebuyers to overspend. The exemption should be scrapped, but probably won’t be until after a collapse potentially.

  • Average Man 2 months ago

    This seems bad. At what point does it all collapse in on itself?

    • Joe B 2 months ago

      It’s clear that politicians have no interest in being guinea pigs so my guess is it won’t, and instead there will be gradual pullbacks once rates rise. It’s the path of least resistance.

      • Average Man 2 months ago

        Do they have that kind of control?

      • Doomcouver 2 months ago

        I don’t think you can expect an orderly unwinding like that with a market with this much froth in it. There’s too many high expectations of future price growth baked into these prices to not spark a panic if the narrative changes. The government has even less control over a down market than they did in an up market.

    • Sam 2 months ago

      Same problem in Australia, New Zealand, Holland, England, Europe…..basically all over the world. Seems to me that this is a global situation and if a correction is coming it will be global in scale.

      • Simon 2 months ago

        I hate to be the resentful, reckless, and destructive one, but I can’t wait for the next great depression.

        • Doomcouver 2 months ago

          I don’t even want to know how bad the social problems in Canada are going to be in the next recession. Brace yourself for skyrocketing poverty, crime rates, and general economic misery all around. This 2-decade debt party is going to have one hell of a hangover.

  • Bernadette 2 months ago

    The future emphatically sucks.

  • Dee 2 months ago

    We are basically back in ‘Pride and Prejudice’ times where the rich lived off asset ownership and everyone else served them

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