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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The most sensical thing I’ve heard in a while. Labor and purchase inventory isn’t fixed, so this has a multiplier effect on the way up and down.
Home Depot indicator. Watch it. When it turns, it turns.
What is that? Nothing on Google.
Yea quarterly reports. I’m sure the price and availability of materials is going to affect that as well.
Commissions, construction, etc. are all going to fall. It’s a managed economy, but the people managing it are recklessly inflating their own interests.
Guys, the whole world printed so much money and inflation is coming for everything. How is housing going to be cheaper? All you have to do is see what happened in Asia during periods of high inflation. Housing always increase even faster than inflation. Because housing is the end node of all inflation.
Most of the posters here don’t understand the entire world is printing money… they don’t even realize that CAD has been one of the strongest currencies due to being a resource heavy country.
CAD appreciation is largely due to capital flight from US dollars, not resources. You can find this narrative in many interviews with Dalio, Marks, etc. Furthermore, CAD strength is a drag on our export based economy (higher CAD, more expensive for international importers). Housing is already a considerably higher part of GDP than in any other G7 nation which increases sector sensitivity to other factors. Your argument uses cursory and incomplete facts to drive a flawed narrative. Please quote sources next time.
Strongest currency maybe but what does that say when you need 200k more yo buy a house?
That tells me it’s still being devalued!
Most of the posters here don’t understand that CAD compared to other pairs is weak, it’s only gaining ground against the US that’s implementing every socialist policy Canada has, and then some.
There is a great documentary on this topic based on a 2000s best selling book in Japan. It is written by a well respected economist. You can find it free on YouTube: “The Princes of the Yen”. History has a tendency to repeat itself.
Spoiler alert : everything goes bust
What happens to the interest rate during inflationary environments? Housing won’t be immune to defaults. There will be a lot of bag-holding investors. If you have a home to live in and can weather the higher interest rates you will be safe. People with multiple properties will suffer big time.
Few issues with this:
(1) Household leverage and inflation path dependency.
(a) Inflation increases very fast over a five-year period than on renewal **if** incomes also rise by a commensurate amount borrowers win. If we have stagflation then borrowers lose.
(b) Inflation is slow to rise but then picks up near the end of the five-year period when most of the mortgages from 2020 to 2021 are up for renewal then it’s game over, many borrowers will not qualify for renewal. There is also a chance that negative equity borrowers are forced to put more money down to re-secure the asset.
(2) Money printing may only fill holes in the economy, i.e. there is potentially no inflation or even deflation. North American equity markets are at pre-great depression valuations.
(a) Despite low rates people still increasingly can’t afford their mortgages because their incomes are falling while the principal they paid stays the same.
(3) Values are already very high relative to borrowers ability to pay, even if home values increase very rapidly during an inflationary bout as you say there is a good chance that they will fail to keep purchasing power. There are better inflation hedges.
Inflation isn’t what’s driving this, though, it’s rather massive amounts of cheap debt that Canadians are willing to take on. I sure don’t see any inflation in wages. Canadians are getting squeezed with an ever-increasing cost of living and stagnant wages, but that’s not stopping our real estate prices from soaring… for now. But eventually the euphoria will fade and people will realize that Canada is actually a shitty place to try to live and certainly not worth the premium.
“Housing always increase even faster than inflation” – not always true. For e.g. India has a very high inflation rate >5%, however in last 8 years the house prices have only gone down due to govt. action in preventing dirty money flowing into real estate.
In Canada house prices are growing way faster than income because of dirty money and fake income reporting.
Housing in Canada is a pure consequence of corruption.
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