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 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 GrowthThe 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 GDPCanada’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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