Most didn’t think it was possible, but this morning’s numbers show Canada is now more dependent on real estate. Statistics Canada (Stat Can) GDP data shows residential investment made a big climb in Q4 2020. The segment of investment has grown much faster than total GDP over the past few years. Canada is now almost 30% more dependent on real estate than the US was during their housing bubble.
Residential Investment
Residential investment is real estate’s direct contribution to GDP, but not the total. Canada’s data includes construction of homes, renovation, and ownership transfer fees. There’s a lot of GDP activity from housing missing though. For instance, only major renovations are included, not superficial. Some industries with a large real estate component are also in separate categories, like insurance and finance.
Now that you know what goes into residential investment, it’s easier to understand the importance of it. Too little residential investment can be a sign of weak confidence in the economy. It also creates a drag on employment in the sector.
Too much residential investment can be a sign of excess and/or misallocated capital. The more capital devoted to just warehousing people, the slower the economy grows. It also becomes extremely difficult to move those investment dollars into new industries, without an issue.
During the US housing bubble, experts flagged residential investment as a warning. At the peak, the US had devoted a previously unheard of 6.7% of GDP to residential investment in 2006. It’s still considered an absurd dependency to date.
Canada’s GDP Is 1.5% Lower Than A Year Before
Canada’s GDP made modest gains in the last quarter, and was only a little lower than a year before. GDP was reported at $2.3 trillion in Q4 2020, when seasonally adjusted at the annual rate. The number is 3.29% higher than the previous quarter, and 1.54% lower than the same quarter a year before. It is still negative growth over the past year, but most GDP losses were in Q2, so it’s not that bad. A lot of ground was regained.
Canadian Residential Investment Growth
The 12-month growth of Canadian residential investment compared to GDP. Numbers are in current prices, and seasonally adjusted at annual rates. Source: Stat Can, Better Dwelling.Canada’s Residential Investment Grew Over 22%
Canadian residential investment is still growing at a breakneck speed, pandemic or not. Residential investment is $213.8 billion for Q4 2020, when seasonally adjusted at the annual rate. The number is 5.83% higher than the previous quarter, and 22.3% higher than a year before. Residential investment isn’t just soaring despite the pandemic. The pandemic’s stimulus was designed to make it soar.
Residential Investment Is Now 9.27% of GDP
Faster growth in residential investment made the economy more dependent on real estate. The ratio of residential investment to GDP reached 9.27% in Q4 2020, up from 9.02% in the previous quarter. Just a year ago, the ratio was a still high 7.45%, which looks tiny right now. This would be the most dependent Canada’s ever been on housing.
Canadian Residential Investment % of GDP
Canada’s residential investment, expressed as a percent of GDP. Source: Stat Can, Better Dwelling.Canada was already unusually dependent on real estate for economic growth. Now it’s crossing the line into an uncontrolled addiction. It appears when the pandemic hit, the country didn’t know what to do, other than lean on the industry even further. It doesn’t seem to be an accident either, with the Bank of Canada (BoC) stating Canada “needs the growth” from real estate, just last week.
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What the government won’t say out loud is they need the government revenues, and this is one easy way to generate transactions revenues through taxes without raising income.
Vancouver’s trying to tax anything, so it’s become obvious. They’re looking at a 5% hike to property taxes, so it would be ideal if properties went up for them.
This feels like it should be a problem, no?
So Canadas GDP shrank 5.4% in 2020 and that made it the worst year on record.
The government clearly has no plans to develop our rely on other industries per Macklem’s justification on continuing to inflate the housing bubble.
If the 9.3% reverts to the mean, that means we’re looking forward to another year of shrinking GDP that’s close to as bad or worse … Are we domed to live in perpetual depression, or what am I missing.
The government needs to be careful in how they interpret 5.4% decline. Or they’re interpreting it the way they want to for handouts. Most of the drop is due to restricted business activity, not a loss in the traditional sense.
The recent quarterly number gives a more accurate picture, and it’s a much smaller decline. There were also extreme lockdowns during this period too, so the economy may be exactly where it was once people are allowed to move again. At least in terms of GDP.
But the good news is the complete lack of any real fundamental economic supports means Canada might have created the biggest housing bubble in the history of housing bubbles. Definitely a good thing if you like runaway asset manias.
Longer term yields are rising. They’re about to crush future expectations.
They’ll just suppress future yields. Housing is the economy. You can’t lose, and the government will make sure of it.
They can’t really. They can try yield control measures by buying long-term debt, but they won’t be able to do it without sending inflation higher. They could accept higher inflation, but that’s the reason yields are rising in the first place. It’s a dumb cycle.
History Lesson;
The Canadian Housing Market has been a huge boon to the Canadian economy for decades….and basically took over as the #1 driver of GDP since oil prices plummeted a few years back. It has since become Canada’s golden cow. Now, rather than use the pandemic as cover to deflate the housing market, which would have been the wise thing to do, instead the gov/BOC have opted for a strategy of hyper-milking to off-set the economic fallout.
Whatever your opinions are, we sure live in interesting times……
Yeah, claiming that infinite QE will be able to underpin our economy is a false narrative. Eventually, too much QE will lead to erosion of value in the Canadian dollar, and thus skyrocket inflation. Banks also tend to set rates on American bond yields, not Canadian, so if bond yields in Canada stagnate, and they rise in the USA, expect a credit shock to be all but inevitable for borrowers this side of the border.
We’ll see QE to infinity until we reach hyperinflation.
Only then will credit cease.
The central planners will then blame the guy across the pond.
History repeats itself.
Sure they can as they have in recent years. If bond yields become problematic for the housing market, the BoC will accelerate their asset buying program and inflate their balance sheet. The BoC prefers inflation to deflation.
So Canada is over 30% more dependent on real estate than the US was before the Sub-prime housing market crash? What about home prices…where do they fall when compared to home prices in the US in the same period?
Canada’s housing is about 50% more expensive than USA housing in aggregate. Historically Canada often had significantly cheaper housing when using house price to income ratios so this is a very new trend, and unlikely sustainable for much longer.
This government and the BOC are idiots,
What about housing affordability and rising homelessness?
Maybe we need a little more brain power in these very important positions. They should have left things alone with the interest rates. People would have still left the city for suburbia and the house prices wouldn’t have skyrocketed out of control….35% increase in 1 year is not sustainable and a lot of people will lose money. This is very poor management of the economy. Grade F for failure, big failure!
Unfortunately it’s not just the BoC, it’s most central bankers around the world. Sustained economic stagnation made a lot of developed countries desperate to stoke GDP growth. This desperation is manifest in dangerously low interest rates. The subsequent misallocation of credit towards non-producing assets like real estate has thwarted central bankers attempt to incentivize businesses to borrow however. Also, the BoC likes to think they have more power than they actually do, but they can generally only set rates within a thin margin of the Federal Reserve.
The blame for the housing bubble should fall to all levels of governments that failed to enact regulations to curb speculative market activity on essentials (aka. housing) in a time of dangerously low rates. Heavy restrictions on foreign ownership, and increased taxation on non-primary residences 20 years ago would have prevented the bubble to begin with. Governments were too busy getting fat off of ever-increasing property and transfer taxes as house prices went stratospheric.
The government, politicians and the BoC are not idiots, they’re brilliant.
Unfortunately, they’re scoundrels.
We’re the idiots who refuse to vote them out of office.
The population does not want to exit the matrix and the powers that be knows it.