Real estate is Canada’s crutch after oil slump

BUOYS GDP

ERIK HERTZBERG AND THEOPHILOS ARGITIS OTTAWA • Two things happened last week that were a reminder of just how vital real estate has become to Canada’s economy.

On Friday, Statistics Canada released gross domestic product data that showed February was a banner month for sectors linked to housing. The real estate industry, residential construction, financial and legal services generated a combined 0.5 per cent increase in output, the biggest one-month gain since 2014. Without those, the overall economy would have contracted slightly in February.

A day earlier, Ontario released a budget that projects land transfer taxes will surpass $3 billion in the current fiscal year, from $1.8 billion three years ago. For the province, it’s the difference between a balanced budget and a deficit.

Measures of housing’s contribution to the economy are imprecise, but estimates largely put the direct contribution in excess of 20 per cent.

It’s much more than that once you add all the indirect effects, with benefits spread widely from lawyer fees to government revenue and increased retail purchases through so-called wealth effects as rising home equity values prompt households to ramp up consumption. The big worry is that Canada has moved from a reliance on oil to a reliance on real estate.

The influence of housing on the economy is so pervasive that it won’t take much of a slowdown to affect the economy, said Mark Chandler, head of fixed-income research at RBC Capital Markets.

“You don’t need a collapse in house prices, you don’t need housing starts to be cut in half for weaker real estate sector to have a significant

“A lot of the strength we have seen in consumption is housing-related,” said Brian DePratto, the economist who wrote the 2015 report. If you strip out the direct and indirect impact from housing on the economy, “you are talking about a much lower trend pace of growth.”

It’s hard to believe, but there was a time not long ago when Canada’s banks lent more to businesses than homeowners. It was the norm in fact until the early 1990s, when mortgage loans surpassed business lending for the first time. Residential mortgages today make up about 52 per cent of all chartered bank loans, versus 21 per cent for business lending.

Still, that portion of business lending is up from a record low of 19 per cent in 2012, suggesting that as home valuations become stretched and as mortgage and capital regulations tighten, banks are increasingly looking to companies for lending growth.

A closer look, however, reveals that much of the new business lending is in fact real estate-related. Bank of Canada figures show 14 per cent of all private business loans from chartered banks are now bound for so-called real estate operator industries, the biggest share in the history of data back to 1981.

The $27.4 billion in private loans to the sector, which represents companies that own and manage real estate assets, exceeds the combined lending to the manufacturing and oil and gas sectors. That’s on top of the $15 billion loaned to developers, more than double levels in 2010.

The chartered banks are also lending to real estate operators at the fastest rate on record — $10 billion since the start of 2014.