Oil slump makes real estate Canada’s crutch
Some worry overreliance on housing can make economy vulnerable in slowdown
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 act as a major drag on the economy, said Mark Chandler, head of fixedincome 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 effect on GDP and incomes,” Chandler said. RBC’s ballpark estimate is that a 10-percent decline in national home prices would knock a full percentage point off growth.
A Toronto Dominion Bank report from 2015 found the housing wealth effect has been responsible for about one-fifth of all growth in consumption since 2001.
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.