Weaker housing market activity may reduce Canada’s economic growth

David Doyle from Macquarie Group warns about weaker activity at the national real estate market reducing Canada’s economic growth.

According to him, the drop in existing home sales will probably affect the growth in the second half of 2021, cutting it by 1% because of excessive reliance on the housing segment.

“I don’t expect a significant prices decline, interest rates will remain low, and when the central bank starts raising them, it will be gradually”, — he noted.

“A stronger challenge comes from housing activity and we’re already noticing certain decline in existing home sales. Such a change may reduce the real GDP growth by 1% in both the second quarter and the third quarter. Moreover, the renovation activity is also moderating. In my opinion, it will become an issue for Canada’s economy.”

The sales of existing homes have been falling, as the COVID-19 pandemic shows certain signs of subsiding and workers return to the usual office mode. Nevertheless, home sales are still historically high.

The national economy has been relying on the housing sector too much in terms of growth since the financial crisis in 2007. The standard residential investment accounts for almost 10% of Canada’s GDP. It’s double the rate in the U.S., and the situation only got worse during the pandemic-caused activity hike.

Doyle says such a strong reliance on real estate makes Canada more vulnerable to economic shocks coming from the residential market.

“The housing sector has been hugely important for Canada’s economy and its growth during the past year and even during the previous 10 years. It’s been a strong growth driver for the previous 20 years and especially over the past 5-6 years”, — he said.

“What we saw during the pandemic, is similar to athletes taking steroids. We’ve seen an additional catalyst on top of an already red-hot real estate market.”

Such a home prices growth has made housing affordability one of the main issues of the current election campaigns, and the main political parties have already shared their plans to solve the problem.