The economy – vulnerable to an economic slump or not

15% of Canada’s economy vulnerable to a housing slump, RBC says

Once again, you have Canadians putting a positive spin on something negative happening. This country is amazingly bulletproof when it comes to bad news. You have an economy that is in the toilet, no manufacturing sector and built on careers for hamburger flippers, but it’s not a problem.

It wouldn’t be a problem if there was anything else going here, but there isn’t. So the demise of the real estate sector would incrementally damage the economy. A decline in the real estate sector may no be absolutely important, but it may be marginally important. But the “don’t worry, be happy” economic policies of this country makes sure that no one has anything to worry about.

The author of the Royal Bank report talks writes about a lot of stuff and comes to this rosy conclusion:

Tallying up the contributions of everything from the building of new homes to the costs of maintaining and running a home, housing-related expenditures climbed to a record
25% share of the Canadian economy in 2016. Not all of this activity is vulnerable to a downturn in home sales. Close to 15% of the economy has a degree of exposure to a drop in home sales, but only 5% has a strong relationship (close to 1:1 for ownership transfer costs and new home construction).

There is always the risk that households pull back more on spending now than in past downturns given elevated levels of household debt and prospective increases in interest rates. That said, this exercise provides some guidance about how a housing market downturn could play out in the broader economy. For example, based on the historical correlations described above, a broad 30% drop in home resales, and attendant spillovers to building activity, house prices, and consumer confidence could translate into a hit on the economy of around 1-2%, with a drop in ownership transfer costs and new home construction accounting for two-thirds of the decline. We don’t expect a downturn similar to that recorded in the early 1990s or even in the United States leading up to the financial crisis. But after Canada’s years-long housing-market party, a mild hangover is likely to follow, with important implications for Canada’s overall economy.

Unbelievable. An economy built on housing-related expenditures. Forget about getting your children to be lawyers, doctors or accountants. They should all become construction workers or sales clerks at Home Depot.

There is nothing that can derail the Canadian economy. A 1-2% drop may make economic growth negative. But for the talking heads like Laura Cooper that’s not a problem, just a hiccup. But it’s not a problem for anyone in Canada, given that Canadians are asleep at the switch. Nothing is a problem, low energy prices, low commodity prices, low economic growth, high debt levels, ridiculous real estate prices, bloated civil services at all levels of government. Nothing will derail the country that has more ostriches than any other country in the world.

But the fact of the matter is that in real terms, jobs, wealth, economic growth, this country is going nowhere. But the numbers will always be given a positive spin. That will never change.

After decades of working in financial services, reports such as this have always been relegated to the recycling bins of history. Too bad no one follows up to see whether anything they say actually ever comes to pass.