Canadian real estate is a major part of the economy, so what happens when things start to slow down? The whole economy suffers. The Parliamentary Budget Officer (PBO) is projecting that Canadian housing will slow the growth of real Gross Domestic Product (GDP). This slowdown in the housing sector is projected to last until at least 2022, mostly due to high interest rates. Surprisingly, there was no mention of high home prices.
Housing Has Been A Significant Contributor To GDP Growth
The housing industry has been a significant contributor to real GDP growth in Canada for the past couple of years. For those that don’t know, real GDP refers GDP after inflation has been adjusted. In 2016, housing represented 0.2 points of the 1.5 points of real GDP growth – just over 13%. In 2017, PBO projects housing will represent 0.2 points of the 3.1 points of GDP growth, that’s 6.45% of total growth. Housing is a giant part of the Canadian economy, and represented a huge part of all GDP growth.
Source: PBO, Better Dwelling.
Negative Growth To Flat Contribution Expected
The PBO is projecting that’s about to change, and housing will be a drag on real GDP growth starting next year. In 2018, housing is projected to be -0.2 points out of the 1.9 points of real GDP growth. That’s 9.5% lower than if housing remained flat for 2018. In 2019, housing is projected to be -0.1 points of the 1.8 points of real GDP growth. That’s a 5.2% decline to total real GDP growth, compared to if housing were flat. From 2020 to 2022, they’re projecting housing will move at the rate of inflation. That is, it won’t be dragging any part of real GDP growth, but it won’t be contributing to the growth either.
Higher Interest Rates Are The Cause
The PBO cites rising interest rates as the reason they believe the housing industry won’t grow. They’re projecting that Bank of Canada (BoC) will hold interest rates at 1% until the end of January 2018. From there, they expect the BoC will hike by 0.25% per quarter, until we hit 3%. This will moderate consumer spending, as “borrowing rates rise and disposable income gains diminish” notes the PBO.
In non-bureaucrat terms, higher interest rates will consume any extra money most households make, and limit the amount people can borrow. This will cool housing demand, as well as increase the interest borrowers pay on existing debt (i.e. mortgages). This typically results in a recession, but the usually optimistic PBO would never project that. The government is one part data processor, one part economic cheerleader. It’s their job to balance the outlook for practical purposes, as well as reassure everyone that everything is going to be alright.
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Photo: Craig Paterson.