For better or worse, real estate is one of the most important drivers of the Canadian economy. Residential structure investment, the amount of capital deployed for building new housing, reached one of the highest ratios against Gross Domestic Product (GDP) ever. Great news for the housing industry, but a recession has always followed at this level.
Residential Structure Investment
Residential structure investment is how we measure economic activity related to building housing. This is the capital deployed in a quarter for new units being built, as well as major renovations. The cost of land is not included in this number, but permanently installed equipment, site preparation, and transfer costs such as commissions are. The final dollar amount deployed isn’t as important as the ratio in contrast to the rest of the economy.
That’s why comparing residential structure investment to GDP makes a lot more sense. Housing functions in a cycle, and always goes boom to bust as a result. When housing supply catches up to demand, the capital (both human and financial) needs to be reallocated. This period of adjustment is almost always inefficient, because… well, how do you take the massive number of people in the housing industry, and get them moving in another industry? It takes a few years, or housing demand needs to build up again. That said, let’s see how high these numbers are.
Residential Investment Reached $40.78 Billion In 2017 Q4
Residential structure investment reached a high for any fourth quarter. According to Statistics Canada, we saw $40.78 billion spent in the fourth quarter of 2017, an 8.42% increase compared to the same quarter last year. This is down from the all-time peak achieved in the second quarter of 2017. Once again, the dollar value isn’t important. Especially if the rest of the economy is expanding as quickly as the need to build housing. Unfortunately, that’s not the case.
Source: Statistics Canada, Better Dwelling.
Residential Structure Investment Represents The Largest Ratio of GDP In Q4 Ever
Residential structure investment is a huge ratio to Canada’s Gross Domestic Product. The ratio reached 7.34% of GDP, the largest ratio for a Q4 ever observed. Looking at historic numbers, we haven’t seen this ratio pass 6.74% without a recession following. It’s pretty difficult to continue to devote this much GDP activity consistently, without exporting a product. Which is kind of what we’re doing with foreign buyers, so I guess the party can keep going for a little longer. Just not forever.
Source: Statistics Canada, Better Dwelling.
Devoting such a large amount of the economy to a single cyclical sector always results in a boom bust feel. We can delay the bust through various factors, but it doesn’t fix the misallocation, it only makes it worse.
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Huge misallocation, like you would believe. I was a Realtor during the late 80s, when there was a bust and everyone knew a Realtor. After prices corrected, and sales declined, there wasn’t enough commissions to go around. A good number kept their license, but went into other industries, I even knew people that went into retail.
Now we’re at 48,000 Realtors in Toronto. To give some perspective, there were 120,000 sales in 2017. TREB is forecasting a decline of 10%, which gives us 2.25 sales per registered Realtor. Top agents produce a sale per month, some more. A lot of Realtors won’t be collecting a pay cheque anytime soon.
wouldn’t*
I think this downturn will see RE change Significantly. RE agents will be cemented as number jockeys and in this day and age we don’t need to pay people to just look up numbers. They will be viewed as greedy and uninformed. Realtor.ca will turn into the Mls with few restrictions. The good ones will always survive but I could see 70% of all agents being up shit Creek.
Question: as someone with history, do you see similar signs? If so, or if not, what are they and why,?
Any idea what it looked like in the US during the last recession?
Wasn’t as high. I saw a comparison a while back. Every single metric in the US prior to their housing bust was not as severe as ours, and that included the percentage of the GDP dedicated to residential real estate. And this comparison was a few years old already. Every one of those metrics has gotten worse in Canada since then.
On a side: inflation for march was 2.2% which is on target for a rate hike, they claimed it was tracking in the high 1%, 1.7%…i would expect on in may/June and against new in October. If inflation accelerates all of this could be brought forward and maybe even a third increase, though unlikely. tick tock.
Next two announcements are May 30 and July 11. I think you have to expect an increase in May 30 at this point.
If 3% is neutral and the US keeps raising rates then you’d have to expect 3 increase from the BoC this year. Its just managing when they are. Post spring market and mid fall market given the influence RE has on GDP would be my expectation.
Foreign money is drying up by the week. Fewer and fewer overseas buyers. Those that have assets are being to unload. Cookie cutter 4bd 4bth in East Gwillimbury is listed at $1.2…i can buy a renovated semi or even a fixer up in Toronto for as much or less. Mississauga is cracking with a number of GTA areas being hurt badly as we’ve seen in Vaughn. Brampton is a mess with similar properties a street over off by as much as $200k…election issue? If this gets bad and we’re in a recession in 6 months they may need to implement Marshall law!
I drove through Mississauga a few weeks ago to visit some cousins. The area I was in, close to Hurontario and Dundas, every other house had been torn down and was being replaced by a massive mansion. Many of which were still under construction and therefor have not even hit the market yet.
I still think this problem is much more to do with locals but in regards to the foreign money, I hate to point the figure at China but they really are the big x factor. For example we are starting to see some of their big companies liquidating oversees assets to deal with local debts. If this trend begins with individuals who own residential it could get very nasty very quick. I guess the big question, do these people have debts of their own at home, and was the sole motivation of buying here to get money out of China at all costs. (don’t mind any price drops we have here, as long as they have something as a Plan B) China has had their own crazy price appreciation on homes. I wonder if some of these deep pocketed investors maybe weren’t as rich as we think. Could any of them have been using the equivalent of a HELOC to speculate on foreign assets?
Furthermore, how much of the local FOMO here (bigger problem) is fueled by the belief that if you don’t buy today we will all be paying rent to the Chinese……..they don’t mind paying super high prices….. they all want to be here….. yada yada….. prices wont go down…..
If all of a sudden these “rich” investors start to liquidate……….. then what do we tell ourselves?
A lot of speculation there…. but that’s what I do
South China Morning Post:
“Since the global financial crisis of 2008, all major economies have kept interest rates at or close to zero and maintained large fiscal deficits. A decade of massive, synchronised monetary and fiscal stimulus has led to the greatest asset bubble in history, to the tune of about US$100 trillion, nearly 1.5 times the world’s GDP.”
We really do have to pinch ourselves to recognize that what has been going on in the city
is totally out of touch with reality. There are traffic jams on residential streets due to all the white Mercedes contractor vans parked on both sides, and delivery trucks lining up to unload marble and granite tiles and countertops.
Where did this windfall come from? Don’t people realize you can’t power a sailboat standing on deck and blowing on the sails?
Without a correction of any kind since 1990, there is entire generation that have never experienced anything but an inflating bubble economy.
It’s a phantasmagorical, conspiracy-driven world where we’ve gone from not believing anything we read, to not even believing what we see, lines increasingly blurred between reality and the digital illusions blaring at us 24/7.
I am sure that in some point in the future we will be watching documentaries about the monster crash/storm that is cooking and will eventually happen…. People will claim ignorance about the consequences of their actions… RE is several countries are casinos… speculation is rampant and clearly all possible indicator linked the fundamentals are not working anymore. Several people are very misguided about the liquidity of RE assets…their is no limit for stupidity : during one of the last hurricanes in the US the police had to broadcast warnings asking people to do not shoot at the storm, as it would not make it turn around 🙂 ….
I think when the dust settles you will be right but also south Asians in some of the western burbs. Foreign money was allowed to pile in and it works with different metrics. Similar to any capital flight it is just that a ‘flight’…as long as the money stays out of the reach of their government they are happy to keep anything. Real estate cleans money very well and once it is in the system it is there. silly Canadians thought they were competing on a level playing field but we were playing basketball while they were on the football field… Fool me once. Tick tock..
Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.
They just keep coming, another “every time we see this, a recession follows”.
When it comes to financial indicators, there may as well be a brass band of economists marching down Yonge St. trumpeting the end is nigh, captain she’s gonna blow.
But of course Mmr types who don’t believe in the pretentious academia of charts and predictive models knows better, and won’t learn his lesson until his basement is overcrowded with the extended family he’s lured into debacle, and the sheriff comes knocking.
What do the academics know? They don’t know what its like on the street. Listen to the RE agents who know how it really works. If people can keep bidding up these prices then obviously they can afford them.
Academics and predictive models are for the most part full of $hit. (Disclosure: I work with and help design “forecast” models for a living.) However, the Mmr’s of the world are also full of it. Because he and his family have gone together and invested in a bunch of condos in Toronto, he thinks they can never fall. He grows angry at “analysis” which shows otherwise. The fact that he comes here to argue and displays anger shows just how worried he is about his investments. Not my fault. I suggested he sell and buy again in a cheaper market. He insists that is not the right move – that Toronto will just keep going up, “because immigration”, “because unreported foreign income”, etc.
Yup, the funniest thing I find are those that jump on the money laundering and tax evasion train to justify why prices will never drop. Last year it was talking about supply shortages vs unlimited demand, now that the media and our public is starting to give a lot of attention to money laundering and tax cheats in real estate that is the new justification for why prices will never go down. Yes the groups probably contributed a fair bit to the boom, but as I believe you pointed out yesterday, to assume this will always be the case and their is nothing our politicians can/or will do a bout it is none sense. The fact it is starting to get so much coverage to me implies that it will be coming to end very soon
*there is
Exactly. Politicians ignored it when they were courting trade with the PRC, and courting votes and campaign donations within certain ethnic communities. However, now that the insane price of homes has become an election issue, and there are MORE votes at risk due to high real estate costs than there are in offending a few ethnic bloc voters, the government is changing its tune.
The foreign buyers’ taxes in Ontario and BC are a perfect example of how the attitudes of politicians are starting to change, out of electoral necessity. The elimination of the disastrous Immigrant Investor Program at the federal level is another. Those changes are just the start. This issue won’t go away. Politicians WILL go where the votes are. And if more and more votes are predicated on “doing something” about keeping foreign money from distorting our markets, more will be done. Much of it will be ham-fisted, ineffective, and possibly counter-productive. But politicians at all levels WILL hammer away at the problem relentlessly until it is dealt with.
Alas, some politicians are slow to catch on.
https://globalnews.ca/news/4154259/vancouver-permanent-resident-vote-investor-immigrants/
Other than the right to vote, what privileges does citizenship entail these days? A permanent resident has all the same rights as a citizen except the right to vote. Now they want to eliminate that last differentiating factor as well? What the hell is a Canadian citizenship worth these days? It’s being devalued by the very people who feign to represent us. These pols are nothing more than traitors.
Well we were recently called “immoral” and basically racist by a Chinese envoy for blocking Canadian ownership by Chinese SEOs.
Pay wall
https://www.theglobeandmail.com/politics/article-chinas-envoy-assails-canadas-concerns-over-state-owned-takeovers/
Non pay wall
https://www.theglobeandmail.com/opinion/letters/article-april-20-were-immoral-coming-from-china-thats-rich-plus-other/
Maybe allowing rich permanent residents a say in our system will provide for a more diverse and tolerant outlook? We should definitely pilot this in an area with the highest percentage of rich permanent residents.
Talk about putting the fox in charge of the hen house.
I vote Conservative MMR, and in fact I am a card carrying member of the federal Conservatives. I had a membership in the Reform and Alliance parties back in the day when the PC’s weren’t conservative enough for me. So you and Zhang can quit tossing out your idiotic accusations that everyone who disagrees with you is a socialist Liberal/NPD supporter. It’s getting tiresome, and it completely and totally misses the point. Worse, it risks turning this comments section into just another partisan pissing match.
I should also add that it was the Liberals who brought in the Immigrant Investor Program 15 years ago and it was the Conservatives under Harper who got rid of it in 2014 because “it wasn’t serving the country’s interests”. It’s not just lefties and socialists who are concerned about the distorting effects of foreign capital.
AM: You really like to open up cans of worms!
So in effect the government is hard at work welcoming wealthy immigrants
that results in the average resident being priced out of their homes, while lauding Canada as a melting pot of equal opportunity and at the same time stirring the pot of xenophobia.
Facing the biggest worldwide asset bubble in modern history , with a bubblehead for PM.
AM: You really like to open up cans of worms!
So in effect the government is hard at work welcoming wealthy immigrants
that results in the average resident being priced out of their homes, while lauding Canada as a melting pot of equal opportunity and at the same time stirring the pot of xenophobia.
Facing the biggest worldwide asset bubble in modern history , with a bubblehead P.M.
I looked into the city councilor who was the one quoted in that article and apparently the one who is pushing for the motion to allow PRs to get passed by the province.
Her name is Andrea Reimer. She was with Green Party…………….And here is how her name shows up on Twiter
“Andrea Reimer 惠綺文”
You can’t make this stuff up!
A post of her’s from yesterday
Andrea Reimer 惠綺文@andreareimer
16h16 hours ago
More
Council: it’s been brought to my attention that I failed to mention we are done for the week. Back on Sunday for the Special Council Meeting where we will do the formal apology for historical discrimination against Chinese people
0 replies 1 retweet 8 likes
Reply Retweet 1 Like 8
Ah yes. Doing the official apology thing for something that happened before you or anyone in the audience was born. Virtue-signalling at its finest.
Haha, good name change.
Have been looking into the PR voting thing some more. Toronto and a few others went down this road before. Still could happen. The main argument for is that municipal affairs are much different than provincial and federal. Could potentially get an immigrant more accustomed to our political system before they get the right to vote on more important matters. Could have some truth but most who come here have made some choice on Canada vs another region. Provides more of an incentive to actually become a full citizen, and gives you time to get a feel for the shared culture here and the way we do things.
What really bothers me, is all of those that push for it mention the need to give better representation to hard working immigrants, refugees, care givers … etc but not one of them acknowledges that yes this would also give a vote to some of those very rich people who don’t really pay taxes, may not spend much time here, help drive up prices for locals of all backgrounds, and may or may not have influence over less fortunate cohorts of a similar background, that may also now get the right to vote. Why not mention this, and then try to provide evidence that it will not be an issue? Could easily say we are just trying to help out people who have the full intention of integrating with our society and to do so in good faith. Could ask for an exemption to any PR that got it through IIP accelerator……. Instead they just skate over the point……… Why? I think Andrea Reimer 惠綺文 the politician from Vancouver says a lot.
Grizz, you sound a little naïve here. All politicians are pushing their agenda everywhere in the world and presenting facts only to support their idea.
And people with the money always win at the end.
Did Liberals say that increase of the minimum wage in Ontario will raise the cost of goods and cut of benefits/services? No, they only told “It will cause more money in the pockets of working people which leads to more spending and growth to economy”. And people believe that all those business owners just pay those salary increases out of those pockets?
It would be fair from the beginning to say that it will partially be covered by the owners, but mostly transferred into increased prices or/and reduced benefits/services. Who would support it in this case if you know that you will actually pay for those wage increases, not business owners?:)
P.S. thank you for your small investigation though. It was fun to read.
Also they completely forgot to mention that as a result of this wage hike government will collect more taxes 😉
All fair points Xelan…….. and I’ve been in sales before. Don’t answer the question you were asked. Answer the question you wish you were asked. Should know better
I’m actually no bigger on ivory towers than overpriced glass condos either, but when it comes to “predictive models” I was actually referring to attractive women who pose for fashion magazines and can tell the future.
Really, I was just rattling the dude’s cage. Not that in his blind rage he’s actually listening to anything or anyone beyond his inflamed worries.
We’re actually just talking statistical data and arithmetic. If he wants to deny that stuff, it doesn’t leave much room for discussion.
For those who think debts are the #1 priority for interest rate decisions:
https://www.bloomberg.com/amp/view/articles/2018-04-19/fed-will-accept-a-recession-before-it-allows-high-inflation
I dont care what you own, what you owe, how much you make, or how much you think your house is worth, that last graph should make everyone nervous.
This coming recession is going to be painful.
-Condo prices have increased about 20 per cent since February of last year, according to the Canadian Real Estate Association
-Since the start of last year, 17 projects, with 3,627 units, have been cancelled in the region
-That’s up from seven projects, with 808 units in 2016
-This month alone, Liberty Development Corp. pulled the plug on a three-tower, sold-out condo development, citing problems with construction financing. Liberty didn’t respond to an email seeking comment
*****
Can someone further explain this? It doesn’t seem to add up….
Source: https://www.thestar.com/business/2018/04/19/threat-of-condo-cancellations-looms-over-pricey-toronto-housing-market.html
To further expand on this: They fully sold out the condo, the underlying asset has risen in value 20%, yet now they cannot finance the project?
The problem is that the builder sold units at 2016 prices and have to build at 2017-2018 labor/material prices.
I’m not sure about the delay between the sale and actual construction but I guess you understand the idea.
Again, it’s a big question if that’s true and if now is much more expensive to build compared to the numbers set in their financial planning (because they should definitely plan for building costs increases), but at least you should understand their point of view now.
Well builders like profits so I’d guess one of the following
a) cost of materials and labour have actually increased so much that the project is no longer profitable
b) condos have been on fire so they think they will profit more by re selling at a higher price
c) they were afraid of losing profit last April and rushed a bunch of product to market before getting proper regulatory approval.
d) they realize they are building way to much and are trying to reduce supply to preserve future profitability.
Thanks Gus, Out of those I think D is most likely. My thoughts are that the developers don’t want to be caught with their pants down as condos take years to complete. It could be like the Oakville pre-build situation but much worse as the volume of units is so much larger. IMO they know what is coming.
e) Their financiers are getting extremely nervous that many of the depositors who are already committed to buying will not be approved for financing under B20 when it’s time to close. This will force the builder to go after them in court, with no assured outcome. Some of these depositors will be insolvent if they can’t close on financing but are legally obligated to close on the condo unit. Thus, the builder’s lenders aren’t completely confident that “70% pre-sold” or even “100% pre-sold” means what it did a year ago.
That’s my guess.
Fair point. Actually the most reasonable thing a builder could do. Avoid a situation where you are chasing a bunch of people with no money. Always thought a single buyer deafault was covered in insurance though. At least for builder
Exactly. Those angry depositors who “lost 20% appreciation” should thank the builder for saving their sorry asses. Otherwise, more than a few of them would have ended up telling their sob stories on websites like this one.
https://www.communityforfairness.ca/our-stories
The Mattamy buyers would be dancing with joy if the builder cancelled the whole project and refunded their deposits. Those condo depositors have no clue the bullet they might have just dodged.
Definitely an interested twist of the story.
I don’t buy that story about rise in the cost of labor/materials which is considered as official version.
Most likely it’s one of the other reasons provided by Grizz and Alistar.
As soon as those buyers file lawsuits the truth should be revealed. So we should know the real reason relatively soon.
What will be the result?
I guess some of those abandoned buyers will try to re-enter the market which should temporary boost condo prices even further before the collapse but others will give up on buying real estate completely for now (and will thank those builders later:))
There is no doubt projects cancellation is a bad sign for RE market.
So if the builders are right here is what we have:
Suppliers /contractors are setting their prices so high that for the builder it’s not profitable to build condos which are so expensive that won’t generate a positive cash flow anymore.
How ridiculous is that?
I’m familiar with one of the builders which is building around Toronto. For those who don’t know here is how it works:
Builder buys land around Toronto in 2010. It takes 5-10 years to get all permission before they can even start selling anything. So first of all they are sitting on 5-10 years of land appreciation.
As soon as all approvals are in place builder launches the sale of 1st phase of houses. Those houses are listed at $400k+.
In 2 years they launch 2nd phase of houses which is listed $550k+ (exactly the same houses on exactly the same land they own).
In another 2 years third phase is launched with houses $700k+ (again, exactly the same houses)
Those sale prices are very close to real prices used by that builder.
It used to be so profitable so you can’t even imagine.
I’ve read that even in Toronto it takes 5-10 years to get all approvals. Builders benefit from all those years of land appreciation so unless they leverage same way as home owners with HELOCS and other ways to use existing equity to launch new constructions it’s hard to understand how rising costs can bring those projects down.
What is stopping the recession? We should’ve in one based on that last graph.