It’s very interesting. This article that appeared in the Globe & Mail summarizes the current economic situation in Canada: Canada’s a real estate nation, just waiting for a crash.
Canada has moved from being a somewhat industrialized nation to a nation that is now more than somewhat dependent on real estate for its economic well-being. In my opinion, wealth generation has become excessively dependent on the real estate market for both individuals and corporate Canada.
The article points out that real estate is now the country’s largest industry. This is supported by a recent publication from Statistics Canada. If you add together the construction and real estate segments, you’ll see that the two combined surpass all other industries in dollar value.
Hewers of wood and drawers of water, not. Canada is now a real estate nation, with little else to keep the economy from sinking into an even deeper funk. Gross domestic product shrank 0.1 per cent in May, and that’s after excluding the negative impact of Alberta’s wildfires on oil sands output. Yet, we’re still buying houses like there’s no tomorrow.
The real estate sector’s share of GDP has grown 0.4 percentage points in the past two years alone, TD noted, while the share of everything else (including oil and manufacturing) has shrunk. Going back 10 years, to May, 2006, manufacturing output is down 11 per cent in real terms and mining (including oil) extraction is flat. But real estate’s contribution to GDP has surged 35 per cent since then.
The TD report looks at the apparent failure of the Bank of Canada’s policies to encourage growth in other sectors of the economy. It also discusses the now limited options available to the Bank of Canada to influence the direction of the economy through an interest rate cut:
While it may reduce business borrowing costs, encouraging investment, rates are already quite low, and demand and confidence in the outlook are the more important drivers – and likely not to be meaningfully impacted by lower rates. At the same time, a rate cut could push already frothy housing markets even higher, increasing the risk of a larger eventual correction. As a result, absent a significant negative shock, the likelihood of further Bank of Canada easing remains small.
To put it another way, it would seem that Canadian policymakers are currently between a rock and a hard place. A rate cut will likely have little impact on the industrial sector of the economy and potentially drive housing prices even higher. It seems that there are not a lot of options here.
Until potential homeowners start to believe that there is more risk to buying than not buying, the likelihood of a slowdown in price increases may be somewhat remote. It should be noted, however, that when the market turns, it will likely turn quickly.