Canada’s economy is demonstrating it has no clue where to find growth if not through a housing mania. Statistics Canada (Stat Can) data shows the gross domestic product (GDP) advanced in Q1 2022. Nearly half of the quarter’s growth was due to residential investment, or homebuilding. Housing has produced such lofty gains, it’s become hard to see other opportunities. This is concentrating risk and makes the country more vulnerable to a correction.
Residential Structures Is Housing’s Most Direct GDP Contribution
Residential investment is GDP’s most direct contribution to output, but not all of it. Canada’s data includes home construction, major renovations, and ownership transfer fees. Notable exclusions include things like superficial renovations, like painting your home.
Industries largely dependent on real estate in Canada also have their own category. Insurance and finance are two examples that are heavily housing related.
On one hand, it’s a fairly big chunk of the spending households conduct. On the other — it’s not even close to the full amount, even before factoring spin-off activity.
Canada’s Residential Investment Grew 5x The Rate of GDP
Canada’s GDP is showing substantial growth but is once again being left in the dust by housing. Seasonally adjusted real GDP grew 0.8 points in Q1 2022, about half the rate seen a month before. At the same time, residential investment advanced 4.3%, an acceleration of 1.3 points over the same period. In other words, residential investment grew 5x the rate of GDP. Every time this occurs, the economy becomes a little more dependent on real estate.
Residential investment was behind a significant share of growth in the last quarter. GDP advanced $16.1 billion in Q1 2022, with residential investment growth about 43% of the advance. Canada’s economy is improving… but largely due to warehousing people and not the work most people do.
Canada Is 20% More Dependent On Housing Than The US In ‘06
Over the past year, GDP briefly began to outpace residential investment. It was a short-lived period, with the segment rising to 8.0% of GDP in Q1 2022. That’s a 0.3 point jump from the previous quarter and the highest share since Q2 2021. It’s down from the recent peak but way higher than pre-2020 — or any prior period that wasn’t a bubble, in hindsight.
Canadian Residential Investment As A Share of GDP
The share of gross domestic product (GDP) from housing investment (residential investment).
Source: Statistics Canada; Better Dwelling.
Speaking of bubbles, many of you understand residential investment due to the US. During the US housing bubble, experts warned residential investment had become too large. Households were diverting money from everything else, and just putting it into housing. At its worst in 2006, residential investment represented a whopping… 6.7% of GDP. It’s a huge number that had experts ringing alarms. Canada’s economic output is about 20% more dependent on housing than the US at peak bubble.
Investing a large share of a country’s capital into homebuilding is a risky game. It’s easy to concentrate since people can be easily sold on investing in one area. However, it’s also concentrating the risk of a correction and increasing negative consequences. The longer housing activity is stimulated the bigger the concentration and harder any adjustment will be.