Housing Nearly 40% of All of Canada’s GDP

It is no secret that the Canadian real estate market represents a large portion of the national economy and household wealth.

From 2017 to 2021, the investment in dwellings as a percentage of total gross fixed capital formation was north of 40 per cent, larger than in other G7 nations. In fact, the next closest is Germany, which has seen its percentage at around 30 per cent, according to data compiled by Bloomberg using numbers from the Organisation of Economic Cooperation and Development (OECD).

This past summer, Statistics Canada reported that the housing market contributed more to the gross domestic product, totalling approximately $267 billion and expanding nearly three per cent from July 2022 to July 2023. As a share of the GDP, real estate makes up more than 20 per cent. Moreover, when this measurement is isolated on a quarter-over-quarter basis, housing accounted for close to half of GDP growth in the first quarter of 2022.

Meanwhile, by comparison, the other sectors contributing to economic growth from 2022 to 2023 were manufacturing ($193 billion), oil and gas ($160 billion), and finance and insurance ($151 billion).

For households, more of their wealth is tied up to residential properties. A September 2022 Ipsos poll found that 77 per cent of Canadians say more of their wealth is associated with homeownership, be it detached houses or condominiums. There is a generational divide, ranging from 68 per cent for seniors to 89 per cent of young adults of Generation Z.

The dramatic reliance on housing among families is manufacturing an immense wealth gap between owners and renters, too. Some estimates place the average net worth at 29 times that of renters.

It is easy to see why housing has become a driver of growth for both the broader economy and households’ net worth. In 2000, the average price of a residential property in the Canadian real estate market was around $225,000. Ten years later, it was about $340,000. Today, the national average home price is above $655,000, skyrocketing nearly 200 per cent this century.

The Toronto Stock Exchange has only risen by about 67 per cent in this span.

Suffice it to say the Canadian economy depends more on real estate – and the public sector – than it did two decades ago.

“We’ve gone all in on two areas, working for the government and real estate, and both of those are non-producing,” Martin Pelletier, the co-founder of TriVest Wealth, told The Hub. “If you want to have economic growth, you’re going to have to redirect capital in some more productive areas of industry, and we’re just not seeing that in Canada.”

What About a Recession?

While younger millennials and older Generation Zers brace for a housing market crash, such an event would not bode well for the Canadian economy because of how much real estate is tied to the nation’s growth.

A recent report from Oxford Economics warned that highly indebted households and overvalued home prices have been leading to a notable pullback in consumer spending.

“We doubted the economic strength at the start of this year would last, and the latest data indicates that a hard landing is indeed coming,” the research note stated. “We expect highly indebted households will cut spending as they deleverage and pay down debt, which should put the principal portion of the debt service ratio on a downward trajectory. Rising interest costs will therefore account for the bulk of higher debt service costs, and likely even greater than our current forecast when factoring in the impact of extended amortizations for variable rate mortgage holders.”

Household consumption, accounting for more than half of the country’s GDP, will be the main drag on the economy, Oxford noted in its note.

In the second quarter, the Canadian economy reported zero per cent quarter-over-quarter growth and a 0.2 per cent contraction on an annualized basis, data from Statistics Canada show. On a monthly basis, the July GDP growth rate was 0.2 per cent, and the August print showed 0.1 per cent.

Ultimately, the Canadian economy is somewhere between recession and stagflation (a blend of anemic growth and inflation). This is on top of the annual inflation rate hovering around four per cent.

Is the housing market preventing a full-blown recession or financial crisis? If so, it might not be able to for much longer, according to a new forecast from the Canadian Real Estate Association (CREA).

In the association’s fourth-quarter forecast update published on Oct. 13, the group projected that home sales would tumble about ten per cent from last year, while the national average home price is expected to slide more than three per cent year-over-year to below $681,000. The cause? Higher for longer interest rates.

“The major risk to this forecast remains what happens with the data that the Bank of Canada is eyeing and what that means for its key policy interest rate between now and next spring. The current assumption is either no more hikes, or at most one more, along with some indication from the Bank at some point that the next move will likely be down,” the report stated.

Since monetary policy operates with a lag, the Canadian economy has yet to absorb the full costs of a five-per-cent interest rate.

In the meantime, households are navigating a housing market with a six per cent mortgage rate, consumers are facing 20-per-cent credit card rates, and businesses are grappling with tighter credit conditions. Fiscal and monetary policymakers might be hoping for a soft landing, but a chorus of economists is preparing for a hard alternative.