CIBC says real estate market cooling will not hurt Canada’s economic rebound

According to CIBC economist Royce Mendes, Canada’s hot real estate market is showing first signs of a slowdown that may reduce the industry’s contribution to the national economy. However, the change will be not so significant to become a point of concern.

“Today, when Canadians are leaving their homes more often, demand for real estate is cooling off following a period of historic activity boom,” – he says. “That’s why we believe this component of GDP will return to a normal level”.

In Mendes’ opinion, a possible weakening of the housing boom will probably not hurt the economy as much as people think, because real estate prices don’t affect residential investment and employment in the segment will hardly take a hit. Business investment, which is the main component of GDP, damaged by the pandemic, is likely to go up in the nearest future due to improving confidence from vaccine reopenings.

COVID-19 pandemic has changed the national economic activity. Now the residential investment accounts for a larger output share than business investment – for the first time since the 1960s. In the first quarter of this year, residential investment accounted for almost 10% of output, leaving business investment behind with its 7.5%.

The lockdowns have caused a wave of Canadians shifting from apartments and condos in city centers to more spacious houses in suburbs. Low mortgage rates and a strong demand for larger properties have pushed prices and sales up. Economists and policymakers started worrying about financial and economic consequences of a potential market decline.

Higher activity in the resale housing market didn’t lead to a large number of new real estate agents and support staff, Mendes says.

“Although the market cooling will reduce the incomes of agents and brokers, it will hardly cause a significant delay in a return to full employment,” – he believes.

In his opinion, there’s no reason to worry from a macroeconomic point of view, but a sharp prices decline remains a threat to Canada’s financial stability, especially in case of those homeowners who took on excessive debts in order to purchase real estate.

The housing market cools down and price growth slows, so consumers will have more money for goods and services unrelated to housing. In addition to it, vaccine rollouts continue, and businesses are becoming more confident in the sustainability of the economic rebound. It means they will make more investments in machinery and equipment, and other sectors.