Canadian real estate was responsible for almost half of GDP growth in the last quarter

Canada’s economy demonstrates that it has no idea where to find growth except through a housing mania. Statistics Canada (Stat Can) data shows that gross domestic product (GDP) grew in the first quarter of 2022. Nearly half of the quarter’s growth was due to residential investment or home construction. Housing produced such large gains that it became difficult to see other opportunities. This concentrates the risk and makes the country more vulnerable to a correction.

Residential structures are the most direct contribution of housing to GDP

Residential investment is the most direct contribution of GDP to output, but not all of it. Data for Canada includes home construction, major renovations and property transfer costs. Notable exclusions include things like superficial renovations, like painting your home.

Industries that rely heavily on real estate in Canada also have their own category. Insurance and finance are two examples strongly related to housing.

On the one hand, it’s a fairly large share of household spending. On the other hand, it is not even close to the total amount, even before the factoring of the derivative activity.

Residential investment in Canada grew at 5 times the rate of GDP

Canada’s GDP is showing substantial growth, but it is once again being let down by housing. Real GDP adjusted for seasonal variations increased by 0.8 points in the first quarter of 2022, around half the rate observed a month earlier. At the same time, residential investment rose by 4.3%, an acceleration of 1.3 points over the same period. In other words, residential investment grew at 5 times the rate of GDP. Each time this happens, the economy becomes a little more dependent on real estate.

Residential investment was responsible for a significant portion of the growth in the last quarter. GDP grew by $16.1 billion in the first quarter of 2022, with growth in residential investment accounting for about 43% of the gain. Canada’s economy is improving…but in large part because of the people who store, not the work most people do.

Canada is 20% more dependent on housing than the United States in 2006

Over the past year, GDP briefly began to outpace residential investment. It was a short-lived period, with the segment rising to 8.0% of GDP in the first quarter of 2022. That’s a jump of 0.3 points from the previous quarter and the highest share since the second quarter of 2021. That’s down from the recent peak but far higher than before 2020 – or any prior period that wasn’t a bubble, in hindsight.

Canadian residential investment as a percentage of GDP

The share of gross domestic product (GDP) coming from investment in housing (residential investment).

Source: Statistics Canada; Live better.

Speaking of bubbles, many of you understand residential investment due to the United States. During the US housing bubble, experts warned that residential investment had become too important. Households diverted money from everything else and just put it in housing. At worst in 2006, residential investment represented a whopping 6.7% of GDP. It’s a huge number that has sounded the alarm by experts. Canada’s economic output is about 20% more dependent on housing than that of the United States at the height of the bubble.

Investing a large share of a country’s capital in building houses is a risky game. It is easy to focus because people can easily be convinced to invest in one area. However, it also concentrates the risk of a correction and increases the negative consequences. The longer the housing activity is stimulated, the greater the concentration and the more difficult any adjustment will be.

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