Why 2016 may be ‘peak housing’ year
There’s one particularly troubling tidbit to be found amid Canada’s surprisingly strong third-quarter growth: residential investment hit the skids.
The annualized 5.5 per cent decline in this category was its worst quarterly showing since 2010, notes Macquarie Capital Markets analyst David Doyle, who views the details of the report as “growing evidence that 2016 will be the year of ‘peak housing’ for Canada.”
The prime culprit for this downturn in residential investment, according to the economist, was a subcategory that serves as a proxy for real estate commissions, which had been more than three standard deviations above its long-term average as a share of GDP — right around where the similar U.S. category was sitting eleven years ago.
The run-up in Canadian residential investment as a whole in years past, and this segment in particular, bears an eerie resemblance to what transpired south of the border in the 2000s, Doyle observes.
If history repeats itself, moving past this peak in real estate commissions won’t necessarily be a harbinger of imminent doom, but rather an early warning sign that a key driver of economic growth has been tapped out — which could foster more widespread weakness further down the road.
Ahead of the U.S. housing bust, the downturn in brokers’ commissions and other ownership transfer costs started in the fourth quarter of 2005, well before the beginning of the financial crisis.
Doyle attributes a portion of the drop-off in this segment to the foreign buyers’ tax in British Columbia, but warns of further softness in the future tied to the federal government’s macroprudential tightening and corresponding rise in mortgage rates.
If Canadian housing is in the early stages of rolling over, the normalization process would see it shrink significantly more as a share of total output, as it currently stands more than one standard deviation above its historical norm. As such, the analyst sees real estate serving as “a significant headwind for 2017 and beyond” for Canada’s economy.
The implications of weakness in the housing complex? A softer loonie, says Doyle.
He calls for the greenback to strengthen to 1.45 against the Canadian dollar by the end of 2017.