Canadian Economy Dangerously Concentrated In Real Estate, But Gov Wants More

Canadian real estate sales are slow but the industry is still swallowing the country’s economy. Statistics Canada (Stat Can) data shows residential investment gained in Q3 2023. The country’s economy is now significantly more reliant on housing than the US during the 2006 housing bubble, and it’s getting worse. Especially as policymakers attempt to slant incentives towards further concentration. Concentrating resources amplifies risks, producing larger consequences for the economy. It’s like they’re doubling down their bet on a housing bubble.

Residential Investment 

Residential investment is the direct contribution housing makes to gross domestic product (GDP). It includes output from new home building, major renovations, and ownership transfer costs. It’s an important, but far from comprehensive measure of homebuilding’s contribution to GDP. For example, finance and insurance are housing heavy measures, but they’re separate categories. There’s also retail, such as paint or furnishings, etc. 

Generally speaking, residential investment should always be growing. That is, at least with a rate that’s consistent with the economy. If GDP is rising, more capital is generally sunk into residential investment. If it begins to outpace GDP growth, experts generally consider it a red flag for non-productive speculation. That is, when credit is too easy, it tends to allocate itself as housing costs. 

If residential investment becomes too large of a share of GDP, it becomes dangerous. Not only is capital being inefficiently allocated, it’s drawing from other areas. Experts considered the US to be one of the most toxic examples when it peaked at 7% of GDP in 2006. That was proven correct when a 3 point correction sent the world into a global financial crisis. The higher the concentration, the more difficult (and violent) the correction will be. 

Canada’s Economy Is Slipping Back Into Further Dependence

Canada lost some ground when it came to lowering its dependence on housing. Residential investment rose 0.1 points to 7.8% of GDP in Q3 2023. The share is 0.4 points lower than last year, but recent incentives are steering more of the economy to housing. Roughly 1 in 13 dollars of GDP are to warehouse new people, outpacing the work those people do. Canada’s economy is about 10% more dependent on housing than the US at the peak of the 2006 bubble. 

Looking at the data, it appears Canada made some progress post-pandemic. It’s worth remembering that during the pandemic, many industries faced trade constraints. This artificially lowered GDP, boosting residential investment as a share. The progress made was largely just a normalization of activity. Residential investment remains unusually elevated, only surpassed twice pre-pandemic (both times in 2017). 

Canada’s Economy Is Dangerously Concentrated In Housing

Residential investment as a percent of GDP in Canada and the US.

Source: Statistics Canada; Better Dwelling.

Canada’s divergence from the US is by-far the biggest issue that stands out though. Back in 2006, experts warned the US dedicated a dangerous share of its economy to building new homes. Healthy boosts in homebuilding would occur alongside general economic growth. A credit-driven bubble produces more capital in building than the economy’s general output. As we all know, that didn’t end well for the US, which corrected. On the upside, it led to a healthier, more diverse economy. 

Canada, on the other hand, doubled down on policies to prop-up its bubble. Inefficiencies are now extended so far, its policymakers are now adopting predatory population growth strategies to drum up demand. They’re even attempting to slant incentives further towards residential investment, concentrating risk further. 

These inefficiencies aren’t without consequence, even to those not in the market for new housing. Canada’s focus on debt-driven growth has it placed last for the OECD growth forecast for the next 40 years. Further concentration is likely to produce even more risk and less opportunity for young adults. 

5 Comments

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  • Michael Hewitson 3 months ago

    The bank of Canada needs to lower interest rates back down to 0-0.5% so that house prices do not decline.
    Otherwise the economy will suffer.

  • Frank 3 months ago

    Great article! A few points, the mass immigration also props up the bubble,many though are either unskilled or if they do have a trade or professional certification they have trouble working in theor respective fields due to poor policies in recognizing their skills. The high household debt can be attributed to excessive taxation in that taxes eat many wage gains as fast as they are realized and wages have not kept up with inflation. Another consideration to high home prices, are the thousands of empty homes across Canada that were bought from offshore investors, and in many cases laundered money. Canada was known for easy access to real estate with no questions asked and became a haven for same. Lastly, intergenerational mortgages similar to Japan where up to 100 year mortgages are available it will not be a surprise to find similar in Canada very soon. There is still a housing shortage and once interest rates begin to fall the housing market will turn and quite quickly. Buyers waiting for further price drops may miss out on home ownership whilr trying to time the market. This market is unlike other times past and will undoubtedly surprise many,the turnaround is predicted to happen very quickly.

  • Frank 3 months ago

    Coupla points, the mass immigration also props up the bubble,many though are either unskilled or if they do have a trade or professional certification they have trouble working in theor respective fields due to poor policies in recognizing their skills. The high household debt can be attributed to excessive taxation in that taxes eat many wage gains as fast as they are realized and wages have not kept up with inflation. Another consideration to high home prices, are the thousands of empty homes across Canada that were bought from offshore investors, and in many cases laundered money. Canada was known for easy access to real estate with no questions asked and became a haven for same. Lastly, intergenerational mortgages similar to Japan where up to 100 year mortgages are available it will not be a surprise to find similar in Canada very soon. There is still a housing shortage and once interest rates begin to fall the housing market will turn and quite quickly. Buyers waiting for further price drops may miss out on home ownership whilr trying to time the market. This market is unlike other times past and will undoubtedly surprise many,the turnaround is predicted to happen very quickly.

  • Ron 3 months ago

    Canada is financially dependent on 2 huge industries. Of course the most obvious is residential real estate. The other which is beyond massive is money printing or as the lay person knows it….counterfeiting. When both are eliminated in the future we are an extremely poor 3rd world country.

  • jim 3 months ago

    Real Estate is a cancer in the economy.

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