Canada

Canada’s Drop In GDP Made The Economy Even More Dependent On Real Estate

Canada’s real estate industry has seen a smaller impact than the general economy during the pandemic. Statistics Canada (Stat Can) data shows residential investment fell in Q2 2020. The drop was smaller than the one GDP made though, meaning the economic dependency on real estate grew. At least for the next few months.

Residential Investment

Residential investment is residential real estate’s direct contribution to the economy. It includes the construction of new houses, major renovation, and ownership transfers, but it’s important to remember it’s not a comprehensive measure. For instance, renovations don’t cover superficial renos or routine maintenance. Roofs are in, but painting the baby’s room isn’t. Ownership transfer costs include things like agent commissions and lawyer fees. Real estate is a much bigger contributor to the economy, and this is just the most direct measure. For example, insurance and finance are also largely dependent on real estate, but are independent segments.

Drops in residential investment are considered red flags for the economy. Research from Norway’s central bank notes drops in residential investment precedes a recession. Countries with high rates of ownership, like Canada, tend to have the strongest link. Countries with low rates of ownership, like Japan, have the weakest link. Often people think a slowdown in new building is just the end to an overheated real estate market. In reality, it’s a sign of other issues throttling the investment into this area.

Canadian Residential Investment Drops Over 11%

Residential investment made a small increase on the quarter, but is down from last year. The total estimate is $39.24 billion in Q2 2020, up 1.87% from the previous quarter. This is a 11.36% decline compared to the same quarter last year. While the decline is large, it was smaller than the one gross domestic product (GDP) made.

Canadian Residential Investment

The amount spent on residential stuctures in Canada.

Source: Stat Can, Better Dwelling.

GDP made a sharp (and expected) decline last quarter. The number came in at $484 billion unadjusted in Q2 2020, down 10.52% from the previous quarter. This represents a decline of 14.70% compared to the same quarter last year. Since the drop for GDP in general was larger than the decline for residential investment, the economy became more dependent on real estate.

Residential Investment As A Percent of GDP Increased To 7.48%

Residential investment as a percent of GDP is still trending lower, but it’s significantly higher than last year. Residential investment as a percent of GDP reached 7.48% in Q2 2020, up from 7.25% last year. While it’s a significant climb, it’s still much lower than the record high of 8.69% hit in Q2 2016. Short-term it’s an increase, but on a longer horizon there’s still a downtrend.

Residential Investment As A Percent of GDP

The amount of Canadian residential investment, expressed as a percent of GDP.

Source: Stat Can, Better Dwelling.

Canadian residential investment is lower in dollar terms, but not dropping nearly as fast as GDP. This is printing a short-term increase in the dependency ratio. However, many of the factors that dragged GDP lower in Q2 are being considered temporary. As the economy returns to normal, the ratio of residential investment as a percent of GDP should continue its downtrend. In the meantime however, the country is getting a little more dependent on real estate.

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8 Comments

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  • Jamie Cass 3 months ago

    There’s a reason the BOC rushed to lower mortgage rates. If housing unravels, the ponzi economy is exposed.

    • Danny 3 months ago

      100% true. It’s a house of cards (no pun intended)

  • Trader Jim 3 months ago

    US was over allocated at 6.5% in 2007. That should tell you how big the bubble is in Canada these days.

  • dealing 3 months ago

    The government has an angeda to keep the housing prices up.. its becoming insane now.. i wonder what happens when deferrals and govt stimulus runs out and unemployment rises…

    Let this house of cards fall so the economy can restart again.

  • alvi 3 months ago

    All central banks have lowered interest rates just not the BOC

    • Itchy Bear 3 months ago

      All central banks lowering their overnight rates/equivalent.
      A lot of them doing quantitative easing on top of that, but Canada’s version seems to focus very heavily on increasing mortgage liquidity so banks keep mortgage rates lower even than they’d be even with the overnight rate at just .25%… If BOC want background these mortgages, presumably banks would see more risk, give fewer mortgages, increase their mortgage rates.
      See:
      https://betterdwelling.com/bank-of-canadas-mortgage-buying-is-a-quarter-the-size-of-new-mortgage-credit/

      • alvi 3 months ago

        Yeah maybe the is why bank stocks in Canada have rallied strong in last few months

  • Opo 3 months ago

    If we allow house prices to correct back in 2008 we wouldn’t be in this mess. If we keep propping up this bubble we are going to face even more problems later. Let the prices come down or there will be no recovery.

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