How dependent is Canada’s economy on housing market?
Economists look for factors behind GDP’s unexpected 1.1% dive in April-June
A troubling Statistics Canada report last month may indicate that the country’s economy has already entered a chilly fall.
Statistics Canada attributed the drop to declines in home resale and exports. But experts say the second-quarter dive into negative economic growth may have little to do with a cooling housing market, which remains in sunny summer territory.
“The best way to put this is think of it like a hot summer day versus a sweltering summer day,” says mortgage industry specialist Leah Zlatkin.
“So it had been a sweltering summer (in the first quarter) when it comes to real estate, and now quarter two was a hot summer day,” says Zlatkin, the principal broker at Toronto’s Brite Mortgage.
The unexpected downturn — which saw gross domestic product contract at an annualized rate of 1.1 per cent from April to June — could change everything from Canada’s economic recovery to the results of the upcoming federal election, with affordability a key election point.
The drop, which came just ahead of the election call, was shocking in its magnitude, taking the economy from a hefty 5.5 per cent gain in the year’s first three months.
Even on the pessimistic side, economists surveyed by Bloomberg had anticipated a 2.5 per cent second-quarter expansion, the agency reported.
The decline was attributed by many
economists to COVID-induced supply chain disruptions that have slowed many businesses. But many worried that another factor — a cooling in the crucial housing market — was a far greater threat to the economy going forward.
Zlatkin, who is also a consultant with mortgage and insurance website LowestRates.ca, says the real estate market is far from going cold. It’s just no longer clothes-shedding torrid.
“When you compare hot to sweltering, obviously it looks like things are contracting, and we could be entering one of those hyperbolic incidences where people think the end is coming,” she says. “It’s not really like that. It’s still summer. It’s still really hot outside. It’s just not sweltering. People (earlier) were sweating buckets and taking off every piece of clothing they could.”
But — hot, cold or scorching — how important is the housing market to the Canadian economy?
University of Toronto economist William Strange says some experts have speculated that it can overwhelm any other economic factors.
Indeed, Strange, a professor of economic analysis and policy at the University of Toronto’s Rotman School of Management, says much of the difference between an economic boom and bust can be attributed to housing alone.
Thus, he says, it would not be surprising if a recent drop in home sales played a big part in the overall economic plunge.
“What I will say, though, is that this is a pretty different situation in the sense that the slowdown we’re seeing in housing right now has a whole bunch of things responsible for it,” Strange says.
“One of them is the boom year that we had last year, (and) so this is just kind of a reverse sort of catch-up, it’s a hangover if you will,” he says.
As well, the supply chain disruptions that were pegged as another source of the secondquarter downturn have likely not spared the housing market, depriving contractors for example of parts and materials with which to build or renovate, Strange says.
“So some of the (real estate) slowdown we’re probably seeing is a logistics sort of follow on from COVID rather than the market deciding it’s time for a recession and something that’s driven by market psychology,” he says.
“And that might be somewhat good news, that the supply chain problems presumably will be fixed eventually.”
York University economist James McKellar says widespread supply chain disruptions might be more responsible for the second-quarter GDP downturn than a cooling housing market.
“Try to buy a car, you can’t buy a car,” says McKellar, a real estate and infrastructure expert at York’s Schulich School of Business.
“I looked into it and I had to put money down to get on a waiting list to get a car that might be delivered in 2022,” he says.
There’s also an ongoing labour shortage that is making it hard for many companies to hire needed workers, McKellar says.
“I would point to other factors before I pointed to housing as a cause of this downturn,” he says.
But McKellar says the real estate market is winding a trap that could cripple economic growth in the years to come.
In particular, he says, looming housing shortages — especially for low-income earners — may cause more long-term economic disruptions than any cyclical slowdowns in the sector.
“In the short term, we’ve been able to kind of work our way through it, but I do think it’s a long-term problem,” McKellar says.
McKellar says part of the problem in Canadian housing is a single-minded focus on home ownership — one so dominant that it’s become a major issue in the upcoming federal election.
“If there is a housing problem (however) it’s not the inability of young people to buy a house,” he says. “It’s the inability of society to provide for them, particularly in the rental markets, and we haven’t addressed that.”
Without young people who can’t yet afford homes, without the low-paid, essential workers who keep communities running, any economy will suffer badly, McKellar says.
“In the long term, if young people and families and others couldn’t live in the cities, they (the cities) would die,” he says.
“The butchers, bakers, the candlestick makers. If they can’t live in the city … it’s not going to work.”
Thus the mass building of lowcost rental housing — on a scale seen in some European cities but not yet contemplated in Toronto or other Canadian communities — is key to economic health going forward, he says.
“In the city of Toronto they’re talking about building on some old parking lots,” McKellar says, referring to an infill plan for new rental housing being widely discussed here.
“It’s minuscule. Stockholm has launched into building 100,000 rental units.”
Pedro Antunes, chief economist with the Conference Board of Canada, says home starts have long been a leading indicator of economic health.
“If developers are building homes, they’re feeling confident about the economy, it means people are buying houses,” Antunes says.
“And it tends to generate economic activity down the road. You pour the foundation and then there’s the construction activity that follows, and then people move in and then people go out and buy stuff to furnish the home,” he says.
But Antunes, too, says he expected such residential spending to come down from the extraordinary peak it had attained at the beginning of the year.
“Everything that comes up as high as it did, will come down,” he says.
What did come as a surprise, and what may have contributed more to the second-quarter downturn, was a sizable drop in Canadian exports.
“Exports were extremely weak in the quarter, they came down essentially 15 per cent,” Antunes says.
He says this drop occurred despite a resurgence in the U.S. economy — which would normally have taken in more Canadian goods — and was likely due to more supply chain issues here, especially in the auto sector.
“There was some sense that those supply chain issues were behind us. But that obviously wasn’t the case and that came back to haunt us,” Antunes says.
Many of the contributors to the economic plunge will be temporary, Antunes says, and the economy will head back upward for the rest of the year and beyond.
“We’re still very much expecting that we’ll see a rebound in the second half of this year,” he says, with the caveat that COVID’s Delta variant could throw a wrench into everything.
But economic health plays a large role in determining election results, and any downturn is a likely liability to the governing party, most experts say.
McKellar, however, says the recent and unexpected contraction has not been widely felt among Canadians and that there are likely more immediate concerns on their minds in the midst of a fourth COVID wave.
“My perception is that this downturn has not been felt by very many people, (and) I think there are more pressing issues,” he says. “Even in the housing market there doesn’t seem to be any kind of major drop.”
Antunes largely agrees, saying the downturn may have little impact on anything going forward.
“I don’t know how people will react to this news, (but) to me the second quarter is now in the past,” he says. “I think most of the (positive) forecasts will probably be revised down for 2021 … but it’s just a temporary delay, we should still see the economy recover over the next couple of years.”
In the end, Strange says — as in most things COVID related — people just don’t know what’s in store.
“But I can’t say that the good times are necessarily gone and I can’t say that the Toronto real estate boom is necessarily gone either.”