The Canadian real estate slowdown is putting a drag on GDP numbers. Statistics Canada (StatCan) numbers show residential investment fell for a fifth consecutive quarter in Q1 2019. Historically, a decline in residential investment in countries with high levels of ownership are a recession flag.
Residential Investment and Why You Care
Residential investment (a.k.a. residential structures) covers construction, renovation, and ownership transfer. Construction means new construction of single and multi-family homes. The renovation portion only covers large renovations such as roofs and kitchens. It doesn’t include routine maintenance such as painting or minor repairs. Ownership transfer costs include things like agent commissions and lawyer fees. It’s not a comprehensive bill of real estate’s contribution towards GDP. Instead, it’s the most direct contributors.
Norges Bank (Norway’s central bank) researchers note a drop in residential investment often signals recession. Studying 12 OECD countries, they found the measure to be a strong indicator of the business cycle. Countries with high rates of homeownership, like Canada, have the strongest links. Those with low rates of ownership, like Japan, display the weakest links. Many may think a slowdown in real estate activity just means an end to building condos on every corner. In reality, it’s usually a sign of a more serious underlying issue with the economy.
Canadian Residential Investment Drops Over 5%
Residential investment made a quarterly and annual decline. GDP numbers estimate the contribution at $134.30 billion in Q1 2019, down 1.56% from the quarter before. The decline means this quarter shrunk by 5.08%, when compared to last year. Residential investment logged its 5th consecutive quarterly decline in the most recent quarter. It was also the largest annual decline since Q2 2009.
Canadian Residential Investment
The quarterly estimate of residential structure investment contribution to gross domestic product.
Source: Statistics Canada, Better Dwelling.
Residential Investment Drops To Lowest Percent of GDP Since 2009
Residential investment fell to the lowest percent of GDP in almost a decade. Residential investment fell to 6.50% of GDP in Q1 2009, down 1.66% from the quarter before. The decline represents a drop of 6.31% compared to the same quarter last year. This is the fifth consecutive quarter we’ve seen this number drop as a percent of GDP. It’s also the lowest percent of GDP since Q3 2009.
Canadian Residential Investment As A Percent of GDP
Quarterly estimate of residential structure investment, expressed as a percent of GDP.
Source: Statistics Canada, Better Dwelling.
Residential investment isn’t just on the decline, it’s failing to keep up with GDP growth. If you consider how small GDP growth has been on the quarter, it’s even more of a dark cloud looming. For context, the past 2 major recessions in Canada kicked off after 5 consecutive quarters of residential investment declines. Only once did it not, and that was within a few quarters of recovery of another very large recession. Canada just printed its fifth consecutive decline. Either this recession is late, or it’s actually different this time.
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Even more of an issue when you factor how much “disposable” income used for consumption was from HELOC borrowing. Then there’s the amount of “income” in the country that grew as a result of speculation.
Great comment Ian; short but very important. Houses aren’t tulip bulbs, there are a lot of jobs tied to the industry as well as a lot of downstream spending as a result. When a bubble happens in something like housing the impact of a downturn can be amplified. More so, with housing being the biggest personal expense in most cases, income drops but the debt obligation (or rent) does not or in the case of the latter lagging. Also, tradesmen are one trick ponies; sure some management guys could flip to another industry but talk to one and you realize very few can reasonable go to another job without training. Project managers could do well. I believe the walls being put up to shield the banks is to cushion any writedowns BUT people that doesn’t mean debt forgiveness it is the loss they take when you default and the sell. Tock. BD4L.
What does BD4L mean?
I think it means Better Dwelling For Life, but that’s just a guess.
The more important question is what does “Tock. BD4L.” mean.
And by the time people figure it out, it will be too late.
Best of luck!
Used to be Tick Tock. Now just tock so I think Blue means we’re getting closer to the end. I always look for the posts by Blue. Appreciate them very much!
Better Dwelling 4 Life
Thanks Big Joe and Enocho!
One of the biggest issues is the fallout to the broader economy. We’re going into negative rates to help bolster household debt, but there’s no evidence to indicate cuts or negative rates help with anything but borrowing future income.
In fact, the evidence points to higher rates as a driver of wealth. Less borrowing, more productive investing.
https://www.sciencedirect.com/science/article/pii/S0921800916307510
Despite what people think, debt can’t expand faster than incomes infinitely. When debt grows faster than income, so does future income growth. Distributing future income loss is something people don’t consider. Of course, because in everyone’s mind, they’re never at their peak income growth. It continues to growth infinitely.
Bring on the negative rates! My girlfriend and I got a great deal on a mid 70’s semi in North York last year. I wouldn’t mind my variable rate mortgage dipping a few points, it would free up some of our income for a few renovations we have been planning. We deserve to have a new kitchen and finished basement, so we’re happy.
I only see positive things from negative rates.
When you can’t tell if someone is trolling or just not very smart. When Japan rolled out negative rates after falling this low, home prices fell 40% in real terms.
Negative rates are a sign the economy is damaged beyond any possible near term repair, and leads to massive outflows of capital and foreign investment. We’re not even a specialized economy with a unique language that requires entirely specialized production.
See the Asian Financial Crisis for more details.
Real estate commissions are getting light right here, aren’t they?
Same issue we’re seeing in Australia. We cut rates to help stimulate residential investment, but few people are taking the lending bait. Instead, it’s starting to hit pensioners, who are going to have to get used to living less than golden years.
https://www.abc.net.au/news/2019-06-10/rba-cut-falling-deposit-interest-rate-retirees-first-home-savers/11195472
Boomer demographics is a huge elephant in the room. Increasing life-spans means the turnover of wealth is being delayed by almost a decade compared to previous generations. Recent surveys suggest that most boomers do not intend to downsize until health dictates the necessity.
And with the ludicrous condo prices and near zero savings accounts rates, there is little financial incentive to do so. That is resulting in both boomers and their offspring being increasingly house poor and/or debt-ridden. The consequences of that to the economy as a whole is potentially catastrophic, and the tough-medicine used in the past to mitigate it, higher interest rates, has been replaced by … what?
Canada already has a solution for every problems being economic, environmental and social. Come on Canada you know how to fix this problem, bring in more immigrants. Come on Canada you can jack up immigration number to 500 0000 this year and 1 500 000 visa students. You can do it Canada. To quote Jason Kenney of Alberta, use the magic of immigration Canada.
I know you’re being sarcastic, but it looks like residential investment as a percentage of GDP lines up with peak immigration.
We can try importing as many people as possible here, but at a certain point we’re no longer vetting on quality and they’re going to have just as bad of a time here. That spreads pretty fast, and retention then becomes an issue to pay attention to.
I don’t think rates can be lowered enough to offset the disparity between the cost of average housing and the average Canadian income. It’s a fundamental issue. In an age of billionaires, Canadians aren’t even millionaires. Pull out the unsustainable home equity and most Canadians are bankrupt. Its going to be a sh*tshow.
4-6 points is what’s typically used by the bottom of a recession. We’re going to need to start paying people to take mortgages soon.
Tom how do you see this s*** show rolling out and what do you think the time frame is? I agree completely but the wait has taken longer than I anticipated. I don’t understand how young families can handle 700,000 plus mortgages with their current incomes. I can’t see it being sustainable.
No one can put a time frame to it. Though we try.
It has certainly taken longer than probably anyone on here thought, vocal or lurker.
That said, I agree with your sentiment completely… how the eff are young families buying 700k+ homes!? I don’t buy the parental HELOC as the single source explanation.
you can’t afford it does not mean there are many other people who cannot… yes, housing price is inflated and affordability has gone down but there are still many wealth people out there who are ready to purchase as soon as market stabilizes and the mortgage stress test gets weaker.
The sh*tshow ends when average monthly income crosses with the affordability of an average monthly payment, based on a mortgage established with 20% down. Incomes will rise, house prices may drop, probably both will occur. But the disparity seems to indicate a long wait.
Its a fugazi and they are all bad, bad actors…who have no idea what they are doing, same thing here in Canada…more debt, printing money…more lies daily from all government, mainstream media, bankers, all full of it, bloody scum bags, all of them…and they have to keep interest rates low…or else, crash and a big one because of record debt levels…and none of us know how long this will continue…what a mess…get out of debt asap…be careful…
Do people realize that their nominal income is taxed heavily before it even reach their hands? When you get what’s left you also often pay 13% tax on top of that. Now housing, which is a basic human right is becoming more expensive. Not to mention everything we buy are more expansive when compare to the states. If we add all these factors up young families are really being screwed in this country. These conditions are forcing people with choice leave, which means tax base will shrink for sure. In a couple of years people will be screwed. All just to prop up housing prices? We should tax all “investment” residential properties heavily until prices come back down.
Some tough love is needed here by the Fed…hold interest rates until they put them up..force home owners dipping into their HELOC for the umpteenth time to realize their house is not a bank and start gearing down….gear down people gearing up ain’t work’n…then in five years your lives should be better. more equity less bills…beats going bankrupt and getting a divorce.
gearing down for what? just press that Overdrive button, the incline is just getting bigger….
Young 30’s, 40’s who are renting are still suffering FOMO only they think they DID miss out and are still desperate to buy. I’m very afraid for a relation who sold a Toronto condo in 2015 for personal reasons and wants to get back in because they think “Toronto will never fall”. Incline does keep building!
The US real estate meltdown saw home ‘owners’ destroying their houses before they abandoned them. FOMO morphed into regret. We are not immune, but we can get legally stoned now.
“The US real estate meltdown saw home ‘owners’ destroying their houses before they abandoned them.”
Don’t try that in Canada. Mortgages here are FULL RECOURSE–you’re responsible for the difference if the home doesn’t cover the amount owing on the mortgage.
Johnm – people with nothing to lose abandon their houses. Rules aren’t really top of mind at that moment. And the banks can’t get blood from the stone(d).
Since I come to this site from 2015. It’s been 4 years we are on recession…we need help please help us from your basement lmao. every day i can see how poor home owners suffering lining up at food banks…its so sad. Just wait 20 more years after that you guys will definitely be able to buy a shoe box.
That’s exactly what we’ve been in, we’ve been in a hyper-inflationary bubble, it’s only industry and government propaganda, blinkered thinking and an ass-backwards measurement system that would characterize this bubble market and runaway debt as economic growth. From your pin-headed perspective a cancer diagnosis would be crying wolf until it hits stage 4.
Mmr
Didn’t understand a single sentence.
This comment thread is hilarious. Premise of article, Norway’s central bank has concluded residential investment is on the decline, and it’s a leading indicator of recession.
Canadians: Immigration doe.
There will soon be a huge wave of immigration into Canada of Hong Kong escapees fleeing China’s extradition law that will drive up demand and prices for Canadian residential real estate. Very recently, one Hong Kong emigre bought a condo in the building I am in and paid significantly more per square foot than I paid just over a year ago pushing up the value of mine by at least $350,000. Canadian real estate is an international commodity in spite of measures taken to discourage foreign buyers.