Canada

Parliament Projects Canadian Real Estate Will Drag The Economy Until At Least 2022

Parliament Projects Canadian Real Estate Will Drag The Economy Until At Least 2022

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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27 Comments

  • Reply
    Trader Jim 2 months ago

    Precisely why they won’t be able to raise interest rates, despite the heavy talk of it. Inflation is already way below target.

    • Reply
      Alex Johnson 2 months ago

      Give up already, they are and they will no way around it. Same thing every post…

    • Reply
      EO 2 months ago

      The CAD/USD exchange rate has pretty much priced in a rate hike in January. And the BoC does not base its decision on the real estate market. Rates are decided based on GDP growth and what is driving that growth, inflation, business spending and employment numbers to name a few. All of these factors have been positive news and the BoC has said it will look at the numbers. Based on the numbers rates are going up. Let’s get back to a more balanced economy and weed out the garbage like every cycle is supposed to do.

    • Reply
      Dennis 2 months ago

      If the US moves, we move. You think the United States of America cares about the GTA or GVA market?
      US is at 1.50% and will raise 3-4 time and end 2018 at: 2.25%-2.50%
      Canada is at 1.00%: Do you think we can get away with not raising or raising just 0.25%?
      That type of spread you give you 60 cent dollar and would drive inflation at 3%+ as everything we buy in in USD.
      Also Trump will brand Canada a currency manipulator and destroy us.

    • Reply
      Jonathan B 2 months ago

      Do your homework on who owns the Bank of Canada and what sets the interest rates. Federal reserve owns the Bank of Canada and they don’t care about what the government of Canada thinks. Secondly, the bond market sets the interest rates. Therefore, whether it is beneficial for our economy or not, interest rates are rising.

  • Reply
    Michael Z. 2 months ago

    Has the government ever predicted a recession? Everything is always A-OK. We’ll just import rich people that earn income overseas, and blame long-term resident Canadians for not doing as well as them when things go sideways.

  • Reply
    David 2 months ago

    They can’t and won’t raise interest rates. It would be suicide for the economy. This whole housing cool down story is being way over emphasized. People will always need a place to live, and immigration will continue to push demand as Trudeau ramps it up.

    • Reply
      Matt 2 months ago

      You do realize that not raising rates, means the Candian dollar will plummet because the US will continue to raise them. We will lose our credit rating, housing costs will skyrocket because the dollar is cheap, and toilet paper will double in price.

    • Reply
      Bluetheimpala 2 months ago

      Oh david, please go back to ‘comparables’ and advising your clients to make bad decisions.

  • Reply
    Sam The Housing Man 2 months ago

    Everyone should be writing their MP, at the reckless nature of both B-20 mortgage regulations, and higher interest rates. They’re sending this country into a recession to appease their millennial voting base.

    All because their millennial voting base can’t buy a house until 35? Well, I’ve got news for them. If they switch careers and got to school until they’re 30, they won’t be able to buy a house until they’re 35. That’s how life works. Sorry they aren’t free for everyone.

    • Reply
      Alex Johnson 2 months ago

      Everyone should be writing to their MP to put in the word with the BoC to hike rates even more aggressively and require even bigger downs and shorten amortization.

      Why should the entire country pay for speculative idiots that decided to become millionaires by doing absolutely nothing…as in flip and buy into real estate. You don’t even need grade 10 to get into this real estate “business”…..but now they are crying “don’t raise the rates! You will ruin the economy”. People that ruined the economy are the morons that used cheap credit to buy homes rather than open businesses and create jobs, or perhaps invest into other sectors of our economy.

      Why should people who choose to save and invest their money into things that actually mater, you know things that advance humanity pay for the idiots who decided to “invest” billions into wooden boxes?

      Making money takes effort. Let that sink in. Not taking out loans so that you can get into more debt.

      • Reply
        Alex Johnson 2 months ago

        At the very least…developers are actually creating something.

        People who buy rundown properties and renovate them perform a valuable service.

        Home owners who are into speculation do absolutely nothing, and deserve nothing.

        • Reply
          Matt 2 months ago

          Amen! Incentives should be on new builds, like in many places of the world.

      • Reply
        Willy 2 months ago

        Well said.

      • Reply
        Lahdeedah 2 months ago

        Amen to that.

      • Reply
        Bluetheimpala 2 months ago

        Sam, go home you’re drunk. I am being very kind. Ho Ho Ho

    • Reply
      Matt 2 months ago

      I’m an owner of multiple properties, and I’ll be writing to make sure that they bring in the B20, raise rates, and cause a recession if that’s what it takes. Sorry bud, but people should have been more responsible when borrowing. I don’t have a fancy job, and I’ve been doing everything I can to pay down my three properties for the last 10 years. So I’m sorry you feel that way, but it’s time to raise rates and lower housing costs for others.

    • Reply
      Neo 2 months ago

      Pass Sammy a kleenex. Someone took away the punch bowl and he isn’t drunk enough yet.

      • Reply
        Yeah Right 2 months ago

        Sammy.. CIBC and Royal Le Page say prices are going up in 2018 so you can relax buddy. I’d probably buy a single family home right now to be honest. Lots to choose from in the $3M+ price point in the Vancouver region. Expect to go into multis though and better go no subjects.

        Just joking obvs. Between the horror scene in the single fam. sector that was 2017 (especially in Vancouver), the 20% liquidity evaporation re: b-20 now upon us, and rising long term rates, I think there has been no better time to sit on your hands.

    • Reply
      Totally Nuts 2 months ago

      Normalizing interest rates now is the only way to prevent every Canadian buying a home from getting slammed at renewal when rates inevitably rise. Delaying this will further weaken the dollar, guaranteeing disaster.

  • Reply
    Bluetheimpala 2 months ago

    Jim, my man, you know we’re getting 3 increases next year. Unless GDP gets a kick in the nuts or employment flips they’ll have to do something. Stock market is getting wacky. Debt markets are fucked up. Sure it may/will hurt business but come on, everyone is making money over fist. Alt lends could cushion the blow as the big 6 keep screwing hard working canadians.
    Rate increases have been priced in.
    My friend, I hope you are right but I’m honestly not sure.

  • Reply
    Jungle 2 months ago

    The rest of the (growing) economy is “bigger” than housing, so don’t worry.

    It will “pick up the slack”

    If the rest of the economy stops growing- then be worried about recession. And be very worried about a recession with household debt at record highs.

  • Reply
    Justin Thyme 2 months ago

    So the question is, ‘better to prolong the agony, or better to have a short, sharp shock’?

    If the government creates a crisis, and we go into a recession, will we recover before 2022? Is a deep, short recession better than a long. shallow one?

    But there WILL be inflation.

    Retroactive inflation.

    Where the cost of what we have already BOUGHT goes up.

    That should be incorporated into the Consumer Price Index, so CPI-linked escalator clauses in pension plans will cover the increased interest rates and carrying charges.

    • Reply
      Overton Shifting 2 months ago

      We should time the recession to start early 2019. I think gradual rises over 2018 and punitive regulations on housing like B20 should do the trick. Some nice tax incentives by powerful neighbors to pull wealthy individuals and businesses would round out this recession plan nicely. Justin can then declare all his successes to his boss in Beijing as he starts his re-election campaign in 2019.

  • Reply
    Justin Thyme 2 months ago

    With a real GDP growth of 3.1 in 2017, the decision to raise interest rates will be really, really easy.

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