The Swift Deceleration of Canadian Housing Investment Since the 1980s Bubble Burst

Canada's economic growth has heavily leaned on its housing market, yet signs suggest that this might have hit its pinnacle. The Q2 2023 reports showed a decline in residential investment, marking a drastic shift in its GDP contribution over the past two years.

Unpacking Residential Investment in Canada

To understand the impact on GDP, residential investment is a pivotal metric. This covers the construction of new homes, extensive renovations, and costs associated with ownership transfers. While this captures a significant chunk of housing’s GDP contribution, it doesn’t encompass everything. For instance, the banking and insurance sectors, though intertwined with housing in Canada, are accounted for separately.

It's essential to strike a balance with residential investment in an economy. When this investment exceeds the general economic growth rate, leading to a larger GDP share, it indicates an imbalance of human and financial resources. This kind of economy could be more susceptible to drastic downturns, making them more detrimental than they need to be.

On the flip side, an underinvestment in housing can be an indicator of its own set of challenges. When individuals feel secure about the economy and their jobs, they invest in housing. A decrease in housing investment might indicate dwindling confidence, often a precursor to an economic downturn.

For some historical perspective, consider the US housing bubble. In 2006, residential investment surged to 7% of the GDP, which experts flagged as an alarming proportion. Their concerns were justified when it had to revert to the usual 3-4%, causing widespread job and financial upheavals that echoed across the global stage.

A Dive into Current Trends: Canadian Housing Investment's Decline

The Canadian housing market is currently undergoing a readjustment after touching unsustainably high levels. There was a 2.0% drop in residential investment to $133.1 billion in Q2 2023, translating to a 13.8% fall from the previous year. Although substantial, it merely brings housing investment back to what it looked like before 2020—a time when Canada was still viewed as a housing-intensive economy.

Source: Statistics Canada

Contrasting the general economic slowdown, housing in Canada is decelerating even more rapidly. In Q2 2023, residential investment dipped 0.1 points, standing at 6.1% of the GDP. This is a significant drop compared to the same time the year before.

To truly grasp this rate of decline, one must evaluate it in a broader timeline. The most analogous situation would be the swift plunge in investment witnessed before the late 80s bubble burst.

Source: Statistics Canada

The dramatic shift is palpable. As recently as Q1 2021, housing investments made up almost 1 in 11 GDP dollars. Now, it’s at its lowest since 2001. Such a rapid investment downfall could predict the need for capital rebalancing in this sector, or in more candid terms, an impending recession.

However, there are silver linings. Stimulative demographic strategies are acting as cushions against a full-blown housing investment crash. When juxtaposed with trading allies, Canadian residential investment remains comparatively high. For instance, the US stood at 4.6% of GDP for Q2 2023 in this sector. Nonetheless, with the evident substantial contraction, a challenging adjustment phase seems inevitable for Canada.