September 06, 2022
Canada’s economy is less reliant on real estate, but still dangerously dependent. Statistics Canada (Stat Can) data shows residential investment fell as a share of gross domestic product (GDP) in Q2 2022. After the interest rate cuts in 2020, residential investment soared to over a tenth of GDP. It’s since fallen sharply, but remains much higher than the US at its peak bubble.
Residential investment is real estate’s most direct contribution to the economy. It includes home construction, renovations, and ownership transfer costs. It’s a nice chunk of the contributions of real estate investment to the economy, but far from all. Areas like finance and insurance are real estate-driven, but not included in residential investment. Neither is spending on minor renovations, such as paint.
Canadian Residential Investment Falls To Less Than 9% of GDP
Canadian residential investment represented a smaller share of GDP last quarter. The segment was 8.7% of GDP in Q2 2022, down 1.1 point from the previous quarter and 1.5 points lower than last year. If you didn’t catch it, the past year has seen two-thirds of the decline in the most recent quarter. It was the first full quarter since interest rates climbed.
Canada’s Economy Is Less Dependent On Real Estate, But Still Dangerously Over Dependent
Canada’s economy is still very much overly dependent on real estate, but it’s no longer at its worst. Back in Q1 2021, the ratio peaked at a whopping 10.3 points — a mind-blowing share of the economy. Over 1 in 10 GDP dollars were generated from residential investment. It was a share rarely seen in an advanced economy, if ever.
Canada’s Economy Is Still More Dependent On Housing Than The US In 2006
Residential investment is now at the lowest share of GDP since Q2 2020, but still has a long way to go. Just falling to the point before the 2020-rate cuts requires dropping another point behind GDP. It’s a fairly substantial move.
Despite falling, Canada’s economy is still heavily dependent on residential investment. For context, the US was considered dangerously dependent on housing in 2006 when it hit 6.7% of GDP. The concentration inevitably lead to the Global Financial Crisis.
Canada’s economy doesn’t have the same global impact, but it’s more dependent than the US ever was. The most recent quarter shows the GDP is 29% more dependent than the US at its worst. It either requires a very long slow down of the economy or a deep contraction. Death by a thousand cuts or all at once.
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