Canadian Real Estate Is Back To Swallowing The Economy and Diverting Investment

Canada’s economy was briefly less dependent on real estate, but that was short-lived. Statistics Canada (Stat Can) data shows residential investment outpaced GDP in Q4 2021. As a share of GDP, residential investment is under last year’s record, but rising quickly. An increased reliance on real estate is a trend that began over two decades ago. Since then, residential investment has been diverting capital from more productive uses.

Canada’s Residential Investment Grew 15.7%

Investment in Canadian residential structures hit a new record high last quarter. The seasonally adjusted annual rate (SAAR) of residential investment hit $248.2 billion in Q4 2021. This is up 6.61% from the previous quarter and 15.7% higher than a year before. If you’re even a little familiar with GDP, you’ll notice the growth is overrepresented. 

Residential Investment Is Back To Rising Faster Than GDP

The share of investment in residential structures as a share of output is rising again. In Q4 2021, residential investment represented 9.6% of GDP, up from 9.3% in the previous quarter. It was also at the same level a year before and hit a record of 10.23% in Q1 2021. A pullback from the record share of GDP, but it’s back to trending higher already.

Canadian Real Estate Has Been Diverting Capital From Other Uses

Canadians will often say there’s no better investment than real estate, and it’s true. That’s a big problem when the population sees little reason to invest in anything but housing. For example, let’s look at the growth of Machinery & Equipment (M&E). Healthy investment in this area is a precursor to expanding economic output.

Canadian Residential Investment and M&E As A Share of GDP

The share of gross domestic product (GDP) from housing investment (residential investment) and Machinery & Equipment investment.

Source: Statistics Canada; Better Dwelling.

M&E as a share of GDP slid down to 2.98% of GDP in Q4 2021, down from 3.30% a year before. Looking at the above chart, we can see that M&E peaked around the mid-to late 90s. That was shortly after the last real estate crash, as the economy was recovering.

Since then, Canada’s economy has been growing increasingly reliant on home building. Earlier this year, the share of GDP dedicated to building new homes overtook business investment for the first time since the ’60s. The statement Canada is going “all in” on real estate has never been more true.