Home sales fell 12.6 percent nationwide in April from March, with even steeper declines in Toronto and Vancouver. Richard Buchanan / The Canadian Press
The decline in housing construction, which is taking root across Canada, will act as a barrier to economic growth this year, after a period in which real estate has driven economic recovery from COVID-19, but has also been characterized by fiery speculation and deteriorating affordability. against the background of ultra-low interest rates.
Housing sales across the country fell 12.6 percent in April from March, with even sharper declines in the sparkling markets of Toronto and Vancouver. The National Volatility Adjustment Index, which is adjusting for volatility, fell just 0.6 percent last month, although the fall in prices was greater in some parts of southern Ontario.
Rising interest rates quickly cooled the hectic rally. With interest rates rising, many economists say Canada may be in the early stages of a prolonged decline in housing, albeit welcomed by prospective buyers.
For a housing-increasingly economy, the downturn is likely to affect economic growth in the near future – not only through direct channels such as reduced real estate commissions, but also indirectly, such as lower household spending, who feed on mortgages and now face higher debt service costs.
The pandemic housing boom is waning. Economists forecast a price adjustment of 10-20%.
Toronto’s housing market “suddenly enters the market for buyers”: chief economist of BMO
“Unfortunately for Canada, we are now in a very dangerous situation where our housing measures are extremely stretched. “The pandemic has basically put what has already been stretched on steroids,” said David Doyle, chief economist at Macquarie Group.
As home sales fall and interest rates rise, “this creates significant downturn risks for Canada’s economy,” he added.
Already Canada’s largest industry, real estate became an even bigger part of the economy during the pandemic, largely due to record low mortgage rates that encouraged rampant buying.
Housing investment, as a share of nominal gross domestic product, rose to about 10% at its peak in the last two years, to more than $ 240 billion in 2021. That’s about 7% of GDP before the pandemic – or double the equivalent rate in the United States. For domestic bears, this is a sign that Canadians have become too obsessed with real estate and that the country’s economic situation is too tied to that of the sector.
The total housing investment consists of three elements: new construction, renovations and property transfer costs, which include broker fees, land transfer taxes and other transaction costs.
This last aspect of the investment is most directly exposed to decline. Mr Doyle said the decline in sales in April, if followed by flatter activity in May and June, could limit GDP growth in the second quarter by as much as 1.5 percentage points on an annual basis. If sales continue to fall, the resistance will be greater.
And this is before taking into account the potential side effects of less activity when buying a home, such as fewer repairs and purchases of household appliances.
In its latest forecast, the Bank of Canada forecasts that the economy will grow by 6% in the second quarter on an annual basis. “It seems like a stretch to me,” Mr. Doyle said.
Home construction is an aspect of GDP that can hold up well. The federal government wants to double the pace of housing construction over the next decade, and other levels of government say they also want to add supplies. However, senior economist at Bank of Montreal Robert Kavcic doubts that construction could be much bigger. He pointed out the already strong start of housing construction and the shortage of available workers.
“Physically, there is no way we can actually double the pace of housing construction from what is already the maximum amount of housing we can do in this country,” he said.
However, Mr Kavcic does not see housing investment as a percentage of the economy returning to the cool levels of the 1990s. The basis for the demand for housing is still strong, he said, in part because Canada is aiming for a record number of permanent residents in the coming years.
“I think the point here is that in 2021, monetary policy has been too easy for too long,” he said. “So the price of the asset just outpaced what was fundamentally justified.”
The Bank of Canada has raised interest rates twice this year, reaching 1% of the lowest pandemic level of 0.25%. Bank officials say they intend to raise the reference interest rate to a “neutral” range – which neither stimulates nor inhibits the economy – from 2% to 3% in a very short time.
The central bank has warned that the Canadian economy is likely to be more sensitive to rising borrowing costs than before. After taking on many new mortgage debts over the past two years, the average household now owes a record $ 1.86 for every dollar of disposable income. During the pandemic, investors invaded the housing market and the growing share of borrowers has a sharp ratio between loan and income.
Ultimately, fears are that households in debt will be forced to tighten their belts and drastically reduce their spending.
“Rising interest rates are meant to slow the economy by making loans more expensive. This tends to slow down sectors such as housing, “said Tony Gravel, deputy governor of the Bank of Canada, in a speech last week.
“But this delay could intensify this time because heavily indebted households will face high debt service costs and are likely to reduce household costs more than they would otherwise have.” Our main scenario involves a slowdown in housing activity. But we can see a larger-than-expected delay due to higher indebtedness and unsustainably high house prices.
The way these financially strained households are responding to higher interest rates could force Bank of Canada to “pause” its interest rate raising cycle, Mr Gravel said.
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