Canada

Canadian Residential Real Estate Investment Peaked And Is Heading For Declines

Peak Canadian real estate investment is behind us, according to another indicator. Statistics Canada (StatCan) numbers show residential investment as a percentage of gross domestic product (GDP) is moving lower. Taking a dive through unadjusted data, we can see this trend is primed to head much lower soon.

What Is Residential Investment?

Residential investment is how countries measure economic activity related to building residential homes. It measures the amount of capital spent on major renos and new homes in a period. Land costs are excluded, but the number does include transfer costs and commissions. Creating new housing is great, but the cost of building that housing needs to be relative to the economy. Economies focused on homes, tend to become flat when they run out of local buyers… then international buyers.

Experts measure residential investment relative to economic performance. Comparing residential investment as a percentage of GDP is a common method of doing that. If the percent of investment rises quickly, real estate might be growing too quickly. For example, the US hit just below 7% in 2005 at peak housing bubble. That number has since fallen to under 4% today. The higher the ratio, the harder it is to reallocate both human and financial capital in a correction.

Before you get your knickers in a knot, it has nothing to do with immigration or whether people still want to live in a 300 sqft condo. The supply of housing always overshoots the supply of people that want to own, and have access to a mortgage. When this happens, you have too much capital and people working in the housing industry. Ideally, they get reallocated to more productive purposes, but that requires a recession. You know, since real estate involves a lot of skilled labour. Skilled labour that may not be able to transfer to another industry all that fast.

Residential Investment Falls To The Slowest Growth Since 2013

The growth of residential investment in dollar terms fell to the lowest level of growth in years. There was $36.42 billion of residential investment in Q1 2018, up 1.36% compared to last year. The annual rate of growth is at the slowest pace seen since 2013, and shows a breakdown of trend on the growth chart. The rest of the economy has been expanding, so the deceleration is a sign that peak housing is behind us.

Canadian Residential Investment Per Quarter

The annual percent change of dollar value of residential investment per quarter.

Source: Statistics Canada, Better Dwelling.

Residential Investment As A Percentage of GDP

Residential investment as a percentage of GDP is showing signs of weakening, and fast. Residential investment represented 7.6% of GDP at the end of Q1 2018, when seasonally adjusted. That’s down from the 7.8% of GDP we saw the previous quarter. Despite the decline, it’s about to go lower.

Residential Investment As A Percent of GDP (Canada/US)

Residential investment as a percent of gross domestic product in both Canada and the United States. Seasonally adjusted, on an annual basis.

Source: Better Dwelling.
Unadjusted quarterly data shows this trend is already in decline. Residential investment represented 6.97% of GDP unadjusted in Q1 2018, down from 7.15% last year. The taper brings the ratio to the lowest level we’ve seen since Q1 2016, and much lower than the 8.59% we hit in Q2 2016. Unadjusted data responds much faster to trends than the seasonally adjusted stuff. Expect seasonally adjusted numbers to follow without a surge of new investment. Unlikely to happen while rates are rising.

Peak residential investment has passed, along with the golden age of Canadian real estate. Falling investment doesn’t directly impact prices, but is a sign of industry contraction. The contraction spreads to related industries as well, such as finance and retail. The resulting decline in employment – that can impact prices.

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26 Comments

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  • Bluetheimpala 4 months ago

    I’ll beat JT and Xelan_gta to the punch…if you squint and shake your head while upside down, all of these graphs mean nothing and shouldn’t be used for analysis to help predict future events. The underlying fundamentals and historic data are a fugazi because everything has changed. We’re in a ‘new economy’ and waiting for the ‘new equilibrium’ so we can all shine on like those crazy diamonds in the sky. Feeder homes for ‘tray-quaddas of a millie’, debt levels 50x income,Infinite investors dollars to just keep buying everything up, Bring on this new world. Tick tock. BD4L.

    • Ian 4 months ago

      😂 Let it be known that this is the perfect time for you guys to publish, so Blue gets the jump on trolling everyone else.

    • Grizzly Gus 4 months ago

      LOL! Dying right now

    • Justin Thyme 4 months ago

      There is hope for you yet, grasshopper. Listen to the wise, and learn.

      The experts have been saying for SEVEN YEARS that the crash is just around the corner, and quoting metrics and trends to support their contention.

      Maybe there will be a crash tomorrow, maybe not. But we will never know until we are well into it.

  • Cash 4 months ago

    Just calculated the sales to active listings in Vancouver for the part 30 days.. 13.5 months supply for condos (57% less sales than last year), 16.6 months supply for townhouse (42% less sales than last year), and 21.2 months supply for townhouse (54% less sales than last year)… conclusion: yup residential investment will be dropping further.

    • Toto 4 months ago

      Vancouver turned fast. I like that they’re going to blame a tax on $3million homes, that doesn’t actually impact the vast majority of homes in the city.

      • Cash 4 months ago

        Hah ha yeah. The VanRe condo markett absolutely turned on a dime. It’s probably the B20 rules + rate hikes that killed it though.

    • backwardsevolution 4 months ago

      Cash – you have two lines for “townhouse”. Did you mean something different? Thanks.

    • Justin Thyme 4 months ago

      But in today’s yo-yo market, that supply could just as easily dry up overnight as well.

      It depends on where people are setting the trigger to re-enter the market.

      10% drop? Time to jump in. Pent-up demand explodes. Or is the trigger a 15% drop?

      Look at the stock market. Prices fall 10% in a week, and everyone jumps back in. Prices go back up in a week.

      To paraphrase Blue, it is not TicToc, it is TicToc-Tic-Toc-TicToc repeatedly, back and forth. The pendulum keeps swinging. almost weekly.

  • James Wolfe 4 months ago

    Makes you wonder how long banks, governments can keep interest rates low, keep printing money, going into debt…a home in my neighborhood took over 100 years to teach $100, 000 (2004 price)…it just sold recently for over $400, 000…something is definitely not right…interesting times ahead for sure…bubbles everywhere…get out of debt, and fast…

    • Bluetheimpala 4 months ago

      Not going to claim poverty. My wife and I have the ability to live mortgage free. My father told me “Don’t worry about a mortgage, get the house you like”…have you ever felt the need to slap the man who raised you? it is not a nice feeling. I punched my hamster for release; he was wearing rhinestone culottes in case anyone was wondering. James is speaking the gospel, get out of debt now. BD4L.

    • John 4 months ago

      Pennies to $100,000 is a very steep incline, I hope you realize that. All things equal, that’s like going from $4 to $16.

      If we have a static 8% gain YoY on investment, the dollar value increases exponentially while the yearly %gain remains the same.

      So while i agree with your conclusion… how you got there does not make sense.

      • Thomas Tiger 4 months ago

        Nevertheless, $100k to $400k over 14 years is more than 10% appreciation for 14 years running with an overall inflation rate of about 2%. Clearly that trend cannot continue, but what happens afterward is anyone’s guess.

        • vnm 4 months ago

          How soon, how quickly, and how far, that indeed remains to be seen.
          But if the bubble doesn’t deflate the long term consequences of a debt ridden population trying to support the vastly inflated prices will be so devastating to the local economy that the bubble will deflate.

      • Depth386 4 months ago

        Yeah people’s income has not quadrupled in that time, nor has the price of most of the things they buy. Doubled perhaps, but it’s really an outsized gain for real estate. That is the trend that can’t continue unless we go back to 0 or negative rates.

  • @xelan_gta 4 months ago

    More measures on money laundering and assignment flipping in BC:
    http://www.timescolonist.com/b-c-government-closes-in-on-real-estate-tax-evaders-1.23379606

    “Under the plan, the province also recently announced that it would set up a property ownership registry to bring “hidden owners” of B.C. real estate into the light. It also intends to track presale condo assignments to prevent tax evasion by buyers flipping a presale condo, and establish a working group on tax fraud and money laundering in B.C. real estate.”

  • Justin Thyme 4 months ago

    Most new home construction today is pre-sold.

    In new developments, the developers break it up into phases. They do not open up a new phase (sewers, services, grading roads) until the last stage is all sold out. Condos are not even started until the majority of the units have buyers. Nothing is built on speculation.

    Today, developers and builders are almost NEVER left with unsold housing.

    So how can supply outstrip demand?

    • Moss 4 months ago

      Your logic is flawed here. There are different types of demand – investor/speculator demand, and real demand. For developers and builders, these two types of demand are the same. They don’t care who buys the pre-construction units, as long as someone does. Once they are sold, the developers don’t care what happens to the property once they’re finished building – they don’t have any more skin in the game.

      The problem in terms of the larger market comes when investor/speculator demand outgrows real demand. Since investors/speculators only buy pre-construction units to flip them in the short term, their business model depends on strong real demand. But what happens when, all of a sudden, the real demand on the other end dries up and these investors/speculators are left holding units that they cannot sell? Depending on how much of a discount they need to price their inventory, this may trigger downward pressure on prices. Depending on how steep the prices fall, the confidence of the real demand in the market may waver (“catch a falling knife”), which leads to more discounts, which leads to an eventual cratering of the market.

      Nothing is built on speculation from the perspective of the developers/builders, but if their buyers are primarily investors/speculators, then by proxy, condos/subdivisions are built on speculation.

      • Justin Thyme 4 months ago

        Your line of thought applies only to condos, as no investor in their right mind buys a brand new single family detached on speculation. Every house in a new subdivision is sold to its final resident/owner before the foundation is laid, and the mortgage at least negotiated..

        No, the builder/developers are NOT off the hook. They do not have all of their money until closing. They only have the deposit. Mortgages are not taken out until final closing. The most these speculators will loose is their deposits. They can walk away at any time.

        But the fact is, these units ARE claimed before construction even begins. Supply equals demand. That demand may be fudged, but it still exists. SOMEONE wants that unit enough to put a down payment on it.

        As for taking a loss, the units being completed today were priced two years ago. Prices would have to fall to that level before the buyers took a hit. Even if the price dropped 10%-15% from today, they would still be making a profit. Units being sold today will not be completed for two or three years., Then, and only then, do the buyers take a hit. By that time, they give the builder/developer a choice – either the price comes down, or the buyer walks away.

        So even if the condo market is over-heated, it will be years before it all shakes out.

        • @xelan_gta 4 months ago

          You are wrong here Justin. Before 2017 GTA detached market correction there were a lot of speculators in detached segment including new constructions.
          John Pasalis did amazing job analyzing that and results were even included into BoC’s latest financial system review.

          As for condo sector, watch Vancouver’s market, it’s on its last leg already.

  • Justin Thyme 4 months ago

    Perhaps I have this wrong, but property values are set by the last sale, right? So if the last sale is at $800,000 and then people completely stop buying, because no one wants to pay $800,000 any more, but the property owners refuse to come down, and just hang on, aren’t property values still $800,000? Why can’t property values remain astronomical, because there are zero new sales?

    A moot point, if no one is buying?

    Except that HELOCS are based on assessed value, and assessed value is based on the most recent sales. Even though you can not SELL your house at that price, you can still BORROW on it at that price.

    • Justin Thyme 4 months ago

      It only takes ONE sale to establish property values for EVERY house in that category.

    • @xelan_gta 4 months ago

      People are never forced to buy but sometimes they are forced to sell.. especially during recession.. when they loose their jobs.

  • Justin Thyme 4 months ago

    Look at 1975.

    Q1 down 19%.
    Q2 bounced back up by 50%.

    That was the year of the great winter blizzard.

    • Justin Thyme 4 months ago

      Sorry, not Q2 of 1975, but Q1 of 1976 was up 50%.

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