March 01, 2023
Real Estate News
Canada’s real estate bubble isn’t just consuming the economy, it’s sucking up non-traditional opportunities. Statistics Canada (Stat Can) data shows the underground economy was booming in 2021. The cause of the sudden boom? Housing, which propelled the size of the informal and illicit economies almost as quickly as home prices climbed.
What Is The Underground Economy?
The underground economy is market-based economic activity, which can be hidden, illegal, and/or informal. Contraband sales, illegal alcohol, or being “paid under the table” are common examples. While most of this might be relatively harmless, the tax liabilities are dumped onto those who actually do pay taxes.
Canada’s Underground Economy Is The Size of The Full Economy In Some Countries
Canada’s underground economy isn’t just huge, it’s also growing incredibly fast. Real (inflation-adjusted) growth came in at 4.8%, pushing its size to $68.5 billion in 2021. That’s equivalent to 2.7% of Canada’s GDP, and roughly the size of Panama or Myanmar’s economy. Bluntly put, it’s huge.
Residential Construction Is Over A Third of Underground Activity
Canada’s underground economy is primarily driven by housing, especially construction. Money going into underground residential investment, or capital spent on building housing or major renovations, surged 32.8% to hit $23.9 billion in 2021.
Canadian Housing Construction Is Capturing The Underground Economy
The share of Canada’s underground economy attributed to residential investment—primarily building homes and major renovations.
Unusually large growth, though in line with Canada’s economy-wide business investment in residential structures, explained Stat Can. In other words, the country’s real estate boom also produced a boom in underground building.
Canada’s rising economic dependence on housing has also trickled down to this area. Last year, residential investment made up over a third (35%) of the underground economy. That’s a huge jump from the 24.3% share reported for 2014, the first year Stat Can applied this measurement methodology.
Canada’s Leasing & Real Estate Offices Are Going Underground
Building isn’t the only area to see a surge in underground activity, according to the estimates. Lessors, and real estate offices are also major contributors to these numbers. Until recently, these two areas were almost insignificant, but with the real estate boom comes more incentive to break the rules.
Canadian Real Estate Gave The Underground Economy A Big Boost
The estimated dollar value major real estate segments provided to Canada’s underground economy.
Lessors of real estate, defined as establishments that rent or facilitate rentals, are a big chunk of illicit activity. This segment surged 28.4% higher in 2021, hitting a total of $8.7 billion of underground GDP. The sudden swing helped to push it to 12.7% of all underground output, up from 10.8% back in 2014. Combined with residential investment, just these two areas make up nearly half (47.7%) of Canada’s underground economy.
One of the more surprising developments is the rise in underground activity at real estate offices. In 2021, underground activity popped 225% higher to $1.2 billion—the first time entering the triple comma club. Its share of the underground economy has more than tripled from 2014 (0.5%) to 2021 (1.7%). A relatively small share compared to the other two segments, but we’re still talking about a billion of unofficial activities. It’s also likely concentrated in the areas we’ve seen a sudden uptick of fraud.
An Underground Economy Helps Organized Crime And Money Laundering
The problems resulting from underground economic growth far outweigh any possible benefits. Making up the lost tax revenue from other taxpayers is the most obvious problem. However, a less obvious one is that informality allows organized crime to thrive, providing few checks and balances.
Intelligence reports have highlighted Canadian real estate is a popular tool for organized crime. One agency found criminals often use buildings and renovations to inflate values. The proceeds of the sale are then clean, since the profits are the result of the sale. Any illicit capital used to pay for the renovation, including labor and materials, are just a distant memory. Laundering this way also has the unfortunate consequence of inflating home prices, with just a little capital being enough to influence marginal pressure.
About the Article:Written By: Stephen Punwasi
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