Canada has relied on housing to drive its economy, but housing may have reached its limit. Residential investment, housing’s most direct contribution to GDP, fell in Q2 2023. Over just two years, residential investment transitioned from nearly 1 in 11 dollars of GDP to the smallest share in over two decades.
Canadian Residential Investment
Residential investment is the most direct contribution that housing makes to GDP. Construction of new homes, major renovations, and ownership transfer costs are included. While it covers a lot of the contribution, it’s a far from comprehensive measure. For example, banking and insurance are closely tied to housing in Canada. However, they have their own categories.
Residential investment’s contribution to an economy is a delicate balance. Housing is a necessity, so as an economy grows, its housing investment should with it. It’s only a problem when it outpaces general economic growth, and becomes a larger share of GDP. A high share is a sign of a misallocation of human and financial capital. These economies are focused on warehousing people, instead of what those people do. This amplifies risk, making a downturn much worse than necessary.
Having too little residential investment can be a sign of something equally problematic. People spend money on housing when they’re comfortable borrowing. They’re comfortable borrowing when they’re confident in the economy, and their job. A decline in housing investment is a sign that households are losing confidence. It typically occurs right before a recession.
For context, the US housing bubble saw residential investment reach 7% of GDP at its peak in 2006. Experts warned it was a dangerously high share of the economy, and it proved to be right. As the share corrected to a more typical 3-4%, human and financial capital had to be reallocated. That meant job and financial losses, in that case so large it rippled through the global economy.
Canada’s Residential Investment Is Falling—Fast
Canadian housing is spiraling back to reality, after reaching unsustainable highs. Residential investment fell 2.0% to $133.1 billion in Q2 2023, representing a 13.8% drop from last year. It’s a big drop, but that doesn’t mean housing investment is now scarce. The dollar volume resembles pre-2020 levels, and Canada was known as a housing-heavy economy back then too.
Canadian Housing Investment Is Returning To Pre-2020 Levels
Canadian residential investment in billions of dollars.
Source: Statistics Canada; Better Dwelling.
Canadian GDP Is Slowing, But Housing Is Much Slower
Canada’s general economic output is slowing, but housing is contracting more sharply. Residential investment fell 0.1 points to 6.1% of GDP in Q2 2023. It’s a point lower than the same quarter a year before. It’s hard to appreciate how fast this decline was without examining it over time.
Canada’s Housing Investment Hasn’t Slowed This Fast Since The 80s Bubble
Canadian residential investment as a share of gross domestic product (GDP).
Source: Statistics Canada; Better Dwelling.
There was a really big shift. As recently as Q1 2021, residential investment represented nearly 1 in 11 dollars of GDP. Now it’s the smallest share dedicated to housing since 2001. The last time such a rapid collapse of investment occurred, it foreshadowed the correction of the late 80s bubble.
Canada’s residential investment is falling—both as a share of GDP and in raw dollar terms. A rapid reduction requires a rebalancing of capital assigned to that area. In more blunt terms, a recession to purge inefficiencies.
Stimulative population policies are helping to prevent a total collapse of housing investment. Residential investment is still high, especially when contrasted with trade partners. For instance, US residential investment was 4.6% of GDP in Q2 2023. However, a painful adjustment is still looming with such a significant contraction.
During the 90s correction, housing prices fell while Canada saw its population rip at one of the fastest rates ever.
Yessir. At some point people can no longer absorb the increases—it doesn’t matter how many incentives are put infront of investors and sold as assistance to first-time buyers.
Housing prices in Canada and in Toronto in particular are stupidly incredibly high. A lot of people don’t want to think about it but there is a big correction coming my friends.
It takes 18-24 months for interest rates to do their job. There’s a reason the housing industry is trying to “prove” higher rates “failed” at improving affordability and urging rate cuts before they do their job.
Politicians have always been corrupt and self serving, but they’ve never been this obvious about it.
but just think of how great it’ll be when the Boomers that elected these clowns to inflate housing, realize higher housing expenses are a driver of wages and inflation since the people that work at stores, manufacture things, and provide services—all need to pay for some sort of shelter. v
Justin, some of your assumptions are incorrect. Boomers didn’t elect anyone to inflate housing prices. That isn’t how policy making works. Inflated housing prices are a result of a number of things: primarily unsustainably low interest rates, significant investment in housing and money laundering. In addition, everyone needs to vote. Millennials are the largest voting block, people need to vote for their interests to be at the decision making table.
The Millenials elected liberals/Trudeau. Not the boomers as you state. Most boomers are conservative in their values.
Even if every Millennial voted in the last election for someone else, their simply aren’t enough of them to have swung the vote. This time there is, but they won’t vote since they’re likely emotionally damaged to the point they never see voting working in their favor.
As for Boomers being conservative, that’s just straight up not the case in Quebec and Eastern Canada.
A friend of mine just returned from a visit to old friends in the Montreal area.He really noticed just how socialist people are.Quebec snd Toronto are a different breed.Go North of Toronto to find real people.
Until it affects their house price! I just had to deal with a boomer rolling up their sleeves to do their part in intergenerational theft. Walked away from that person quick smart – the greed was unbelievable!
I do not object to the “clowns” part of your comment but how you get from there to “Boomers that elected these clowns to inflate housing” does not make sense to me. As a Boomer I certainly never voted for any party on the basis that they would inflate housing. In fact, having kids and being concerned generally with the health of our economy and the ability of people to live productive and happy lives, I want the exact opposite – affordability. I don’t know any of my Boomer or other friends/business associates who think any differently. Housing that is unaffordable is terrible for all but a very small few.
Look at the Stats, millennials were the majority voting for the Liberals. Most boomers are conservative.
I think its been pretty obvious for a long, long time….just look at Trudeau 1, Mulroney, Chretien….as crooked as they come….and surprise, surprise, guess what province they are from ? They bragged about it… . “First Quebec, then Ottawa and then the entire country…” ‘French power…’ PET, “How to take over a country through bilingualism…’ PET,
Just follow the money – quebec – Ottawa – the country…they run it all…$$$
We sold our investment properties in February 2022.
Not sad we did.
Smart decision. Now invest that somewhere safe. GIC etc. We are just starting to see the problems in Canada. People are not looking at the bigger picture, this all began in the era of Allan Greenspan’s “new monetary policy” , the only thing Canada did to save itself was not allow sub prime mortgages….. but guess what are the fastest growing sector of mortgages in Canada right now? “Did you know that 12% of Canadians are subprime borrowers?”. And growing.
@Justin Price
Boomers elect liberals?Why would older property owners be affected by younger people having to pay more for rent?
The housing problem has deeper roots. It resigns in the lack of productivity driven by government burocracy, lack of competition and sense of urgency. Real estate market as well as banking industry must be open to American companies. We live in a society with limited options trapped by oligopolies in almost every single sector.
The bigger the pile of crap, the bigger the truck to haul it away. What big business and stupid government has produced will blow up as it always has, and this go-round will be epic as they dragged it out and piled it high.
Does anyone remember ???
We were told that Canadian financial system is very conservative, the banks are SOLID, and we do NOT play fancy games with our economy.
Now we are told that these very smart people were actually playing games with numbers, using rising home values to show that our economy was booming.
The same SOLID canadian bankers are even trying to convince us that 50 and 100 year mortgages are a good idea.
Both the provincial and federal governments believe that it makes good financial sense to CONTROL the poultry and dairy industry to help us, but at the very same time they say that they cannot control this out of control beast of a housing economy because we are a FREE MARKET economy – we are not COMMUNISTS.
And every home owner in Canada WANTS house prices to $5 million for a 3 bedroom semi detached home, even if it kills the entire economy. Who cares about the overall economy crashing ???
As long as people’s perceived home value goes through the roof, they are all happy.
The conservative Canadian BANKER is also very happy to revalue all that lumber and mortar that you call HOME – …….. from its real value of $250 000, to $5 million, so that he can refinance your home and lend you more money.
Something smells real bad. Unfortunately we really do NOT have smart enough people to figure it out.
Maybe YOU can ???
big brain, $250k wont even get you materials to build, nevermind the labour and permit costs. Build a 4 bedroom house in Vancouver costs $1M. The land cost is totally different. West side $4M, East side $1M, waterfront +$10M
What about the hundreds of thousands homes across the country that are being used only as a hotel (air BNB). Make those available for families to live. Investors will sell them and that flood of housing would help correct the prices. All without breaking ground for a new development.
New York just basically banned AirBnb / short term rentals, did it not? QC put controls on it, but there’s no enforcement. Tight restrictions to eliminate the Airbnb business model will free up a ton of property and encourage competition with long term rentals.
We as a society need to get that on the docket. Pronto.
Building materials are up over 10% since January. Contracts are being cancelled by both builders and buyers. Not to mention taxes, permits add 1/3 to the final cost. Someone mentioned 50-100 year mortgages. Intergenerational mortgages are not uncommon in Europe. As much as some would like to see a crash, there is still a housing shortage. If there is a crash, thise wanting to get in will find they are being outbid..by the very investors that orchestrated this entire fiaaco.
WHEN A MILLION DOLLARS IN THE USA BUYS 20-50 HOMES ON LOTS CANADA IS DOOMED.
In any growing economy in the world you have the average house price track average income of one person with a multiplier of 6x. So if in a particular city average Joe/Joanne makes 60k then then average home should cost 360k. What this does is increase natural population growth and therefore economic growth. We are currently in Canada still on average making 60k but housing is 12x-14x average income. So to get back to that sweet spot, both man and woman must work = 0 kids, no pets = overcrowded shelters, no new cars = 50k people out of jobs. So government imports new people, but they get here and can’t afford, nobody is building new rentals, not at reasonable prices, so you will have a generation of haves and have nots. The haves will be people that own a home bought pre 2018, or rented pre 2018, have nots are anyone after. This is not sustainable, unless we start to earn 2x more or housing drops by 50%…Like just think about it, our property prices are exceeding Manhattan or Beverly Hills, the world is a big place, why would you live in Vancouver over Malibu???