Canadian Housing Investment Is Falling, And Will Be A Drag The Economy: BMO

Canada’s housing market giveth and taketh away. BMO senior economist Sal Guatieri dropped some notes on plummeting residential investment today. The segment of gross domestic product (GDP) fell so fast in Q2 2021, it held the whole economy back. The bank warned this is just the beginning for housing investment, as it comes back to reality. As it does, it should be a drag on the general economy for the next few years.

Canadian Housing Investment Declines Over 12%

We already discussed the GDP contraction today, but didn’t dive into residential investment. The segment printed an annualized decline of 12.4% in Q2 2021, dragging total GDP lower. After exports, it was the largest reason behind the economy’s pull-back. “Despite more home building and renovation spending, the segment fell due to a retreat in ownership transfer costs, as sales pulled back from record heights,” he wrote.

Residential Investment Is Over A Tenth of Canada’s Economy

Housing has been consuming more and more of the Canadian economy over the past few years. It now represents so much business activity, just residential investment is 10.1% of GDP. That’s right, building and renovating homes consume over 1 in 10 GDP dollars. BMO calculations show this is 4.2 points higher than the long-run average. For context, the US housing bubble, which wrote the book on bubbles, peaked at 6.7% of GDP in 2006. Economists still debate how an economy became so dangerously dependent on housing. Amateurs.

Source: BMO Capital Markets.

Experts warn high ratios of residential investment will drag economic growth. After all, a huge amount of resources are put into warehousing people. “The report is a timely reminder that the housing sector is now such a large slice of GDP, that it’s likely to act as a drag for some time,” he said.  

Canada’s Housing Slowdown Will Be A Drag On The Economy

Pandemic-driven low-interest rates and quantitative ease (QE) accelerated home buying. As the demand that was pulled forward catches up, a buying gap is likely to appear. This is where the pulled-forward buyers would have bought without lower rates.

These are typical market mechanics, before adding the end of QE and possible rate hikes. The end of QE is widely expected, which would lead to less credit liquidity (and higher mortgage rates). This does the opposite of a rate cut, pushing buyers further out.

Increasing interest rates becomes less likely as economic growth slows. Though, if inflation is stubbornly high, it can force their hand to raise rates. A combination of high inflation and weak growth is deadly to economies. 

Then there is the impact of high home prices, and the fact it’s unaffordable. If only a small percentage of people can afford to buy a home, it becomes difficult to continue to drive demand. Higher home prices reduce qualified demand. “Towering nearly 21% above late 2019 levels, the [residential investment] sector is poised to contract in the year ahead as sales moderate in response to fading affordability and as activity corrects from the Stratosphere,” said BMO. 

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  • Christopher Barclay 3 years ago

    The housing ponzi will always look for the next sucker. It works until it doesn’t.

    • Charlie Lee 3 years ago

      That’s why it looks for new rents overseas. I mean immigrants.

      Welcome to Canada, this local will be taking a share of your income forever now .

  • RW 3 years ago

    The real beauty is higher prices and construction costs mean the number of units being produces becomes smaller as it consumes more of the economy.

    Want to scale from the current level of 280,000 (near-record production) to 350,000 like politicians are promising? That’s another 2.5 points of GDP, before you factor in increased strain on materials and labor, that will also increase the cost of construction… meaning even more of the economy needs to be in on it.

  • Vjkenny 3 years ago

    Well, we see now why we need that 1.3 million immigrants right? But this 4th wave will probably stop this from happening until next year. But overall the population will grow in the medium term.

  • Puthucode V Kumar 3 years ago

    The Canadian housing investments are unrealistic and have become a mockery. It’s almost like gambling with the fundamentals being irrational. For advanced economies, housing investment should only have realistic price and growth, for participation in the economy by all individuals per their disposable level. This will lead to sustainable growth. Hence irrespective of the effect on the economy which can always be controlled through various monetary and non-monetary controls, the authorities should bring the housing sector to the correct levels.

  • david 3 years ago

    Tiff has to follow the USA for the rates.
    The USA will borrow almost 4000B$ by the end of this year to finance a new plan likely to be voted by Congress and Senate. Also Mr Powell will start tapering in few months.

    If rates rise in the USA, we have no choice but to follow otherwise CAD $ will go down making imported goods more expensive (and people will feel poorer)

  • Robert 3 years ago

    If we elect a federal gov’t that cares about and understands the economy and monetary policy, we will get thru whatever is coming at us. If we stick with the current gov’t, we will be in serious trouble.

    For those who don’t know (ie. the woke left), monetary policy is one of the main factors that affects jobs, wages, our ability to pay for gov’t services, and our standard of living.

  • Randy Cooper 3 years ago

    What goes up, MUST come down. Ask Bill Nye the Science Guy.

  • Smug Canadians 3 years ago

    The other problem with these ridiculous RE prices is the cost of rent is going through the roof, in order for the landowners to cover their costs. This is going to be the other shoe to fall since the 20 somethings and the majority of immigrants can’t, and won’t be able to afford, current rental amounts. This is from a recent headline: ‘Low-Income Workers Can’t Afford Rent in 91% of Canadian Cities’

    • Tom Wolfe 3 years ago

      I don’t think the immigrants will be low income. That was several decades ago. These people are not refugees. Immigrants are ultra wealthy, snapping up real estate and lambos, looking to hire Canadians to serve them. Canadians are becoming equivalent to waitstaff in the Caribbean islands, getting towels and drinks for the wealthy foreign other. I think the cake is fully baked, the bed is made, the grave is dug. Canada is forever changed.

  • Jamush 3 years ago

    Lets get out of here

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