Canada’s real estate problem

February 4, 2016 under Useful Articles

by Luke Kawa and Erik Hertzberg
03 Feb 2016

The Canadian economy was largely stagnant through the first 11 months of last year, shrinking by 0.09 percent. In light of the collapse in oil prices, however, things could have been worse.

But the relative resilience of headline growth belies the extent to which the economy is now being supported by one sector: real estate.

Softness in the economy has been concentrated in goods- producing sectors, which shrunk by 2.6 percent year-to-date through November. Given the carnage in commodities, the slump in construction tied to non-residential investment and mining and oil and gas extraction comes as no surprise.

Meanwhile, the services sector continues to chug along with real output up 1 percent. This suggests that the commodity collapse has yet to infect the broader economy. The bad news? The majority of that growth–53 percent–can be attributed to a single sub-sector, and one that many economists fear was cyclically overextended even before this stretch of out- performance.

As a result of its gains in 2015, the real estate industry accounts for 12 percent of Canada’s gross domestic product through November.

“It is concerning to see that degree of concentration coming from one sector,” said Brian DePratto, economist at Toronto- Dominion Bank. “This underscores the importance of real estate to Canadian growth, and also reinforces how key of a risk the real estate sector is for the Canadian economy.”

The Bank of Canada warned that real estate may be overvalued by as much as 30 percent. In its December Financial System Review, monetary policymakers cited the elevated level of household indebtedness and imbalances in the housing market as two key vulnerabilities to the financial system.

Abraham Lincoln famously said that “a house divided against itself cannot stand.” One corollary that Canadians can take as gospel: An economy built on housing can’t stand for too long either.

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