Canadian real estate is such a big part of the economy, just its spin-off economic activity is now a huge deal. The Canadian Real Estate Association (CREA) has forecast big 2021 home sales, but the second half will be slower than the first. Next year they see a less exciting, but more typical year for sales. Using their estimates of spin-off economic activity from each home resale, this year’s economy will get a boost. As for next year’s slow down though, that means spin-off will be a drag on economic growth.
Spin-Off Activity From Home Resales
One way real estate contributes to the economy is through spin-off economic activity. This is secondary spending that occurs during a home buy, beyond a house and land. Paint, furniture, moving fees, legal fees, and a whack of other things are spin-off activity. Buying a home isn’t cheap, and neither is all of the extra spending that usually follows.
On the upside, this spin-off economic activity is a significant part of the total economy. CREA estimates the average home resale generated $66,122 in spin-off economic activity. That’s a huge amount of money, and gives a big boost to the economy when home sales rise. If home sales fall, it withdraws some of that activity as well, leading to excess capacity. This year will see a huge benefit from higher home sales. However, next year’s falling forecast shows it may be a drag on the economy.
About The Calculations
Today we’re going to be using numbers from CREA to estimate the impact on the economy from spin-off activity. We’ll use their estimates for spin-off activity, and home sales. Then we can look at how much it boosted the economy, and how much it may be a drag next year.
One important note about today’s calculations is inflation. Only the 2018 estimates were readily available, and we didn’t adjust them for inflation. Historically spin-off estimates have moved larger than inflation, so they should be higher. This means we will be underestimating the contribution to the economy this year. It also means we’ll be underestimating the drag on the economy when sales fall next year.
Canadian Spin-Off Activity Reached A Record High
The dollar value of spin-off economic activity reached a new record high last year. The estimate comes in at $36.27 billion for 2020, up 13.33% from the year before. That’s on top of the 6.06% increase 2019 made on 2018’s activity. Those are rookie numbers compared to how much is expected in 2021.
Using the CREA home sale forecast, this year should demolish those numbers — even as sales slow. The estimate works out to $46.42 billion in 2021, up 27.99% higher than a year before. If the year hits projected economic growth, just the spin-off economic activity would be 1.91% of GDP. There’s a large dependence on real estate, when the spin-off of higher home sales, prints 0.4 more GDP points.
Canadian Real Estate Spin-Off Activity ForecastAn estimate of spin-off economic activity resulting from Canadian home resales. Source: Better Dwelling.
The CREA forecast for next year shows things will calm down a little, cooling spin-off. The estimate is $40.57 billion in 2022, down 12.60% from the 2020 estimate. Falling $5.85 billion, or about 0.25 points of GDP, is nothing to sneeze at. Especially considering CREA forecasts are often considered a little generous.
Remember, this is just the spin-off economic activity generated from home resales. It’s not even the direct contribution of real estate, or finance and insurance activity. When an economy goes all-in on real estate, a bump in sales during a recession is a gift. If they fall during a recovery though, it becomes a curse.
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