Canadian Housing Investment Correction Rate Fastest Since 80s
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 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. 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. 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. 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.
Tags : Canada housing economy residential investment GDP construction new homes renovations ownership human financial capital