Canada's Housing Bubble

Sep 30, 2010 Steve Ladurantaye Globe and Mail

The housing sector that helped pull Canada out of the recession now threatens to derail the recovery, as a slowdown in sales and construction acts as a drag on economic growth.

The economy contracted for the first time in almost two years in July, and the formerly red-hot housing sector was a key contributor. And with Canadian consumer debt at all-time highs, even a modest slip in prices could have large consequences for the broader economy as cash-strapped consumers rein in their spending.

Housing-related activity – including the rental market and the sale of existing homes – now accounts for almost 20 per cent of gross domestic product in Canada, the Canada Mortgage and Housing Corp. said Thursday in its annual report.

That’s the highest level in a decade and added up to $307-billion in 2009. Housing’s portion of the economy has grown steadily for the past 10 years, but Bank of Canada Governor Mark Carney warned Thursday that declining affordability and subdued income growth will dampen further growth.

“It appears unlikely that private consumption will be bolstered by substantial house price gains going forward,” Mr. Carney said in a speech assessing the state of the Canadian economy, on the same day Statistics Canada said GDP contracted 0.1 per cent in July, the first monthly drop since August of 2009.

If resale prices were to fall just 5 per cent, $10-billion would be sucked from the economy, said Benjamin Tal, deputy chief economist at CIBC World Markets. Consumers would spend less, causing problems in other sectors of the economy.

Many forecasters have predicted lower prices in the next year, including the Canadian Real Estate Association’s estimate of a 1.2-per-cent decline and Toronto-Dominion Bank’s call for a 10-per-cent drop. Resale prices have been slipping since July, according to CREA data.

“A slowdown in housing is significant and there are so many different avenues in which it affects the economy,” Mr. Tal said.

Construction jobs, which have accounted for about 33 per cent of the job market’s recovery post-recession, are largely dependent on a booming housing market. And with housing starts expected to tail off in the next year, the jobless rate will likely rise as construction companies lay off workers.

“A lot of the companies were able to ramp up their building in the early part of this year because there was a lot of demand as people bought earlier than usual,” said Victor Fiume, president of the Canadian Home Builders Association, noting consumers were trying to beat the HST in Ontario and B.C., as well as changes introduced in April that made it harder to qualify for a mortgage. “But that’s not a sustainable thing.”

The annualized rate of housing starts dropped 3 per cent in August compared to July, to 183,300 from 188,900, according to the CMHC. That’s near the minimum amount of activity needed to keep up with demand from new families and immigration.

“Those are high quality, good paying jobs,” Mr. Tal said. “You don’t have to be an economist to predict those jobs won’t continue to appear. And not only will it be difficult to replace them, it may be impossible. It is a major negative.”