Canadian GDP Slips Lower As The Real Estate Boom Turns Into A Drag

Canadians have been house crazy during the pandemic, and it’s been a big boost to the economy. Now with housing returning to more typical volumes, it’s turned into a drag on the economy. Statistics Canada (Stat Can) data shows real gross domestic product (GDP) slipped lower in July. Even with a pullback, it’s making progress towards reaching pre-pandemic levels. However, this time it’s more dependent on real estate — which is now proving to be a drag on the recovery. 

Canadian Real GDP Slipped Lower, But Is Still Making Progress

Canada’s GDP made a small contraction in the most recent numbers. Real GDP dropped 0.1% in July, following a 0.6% increase in June. It now remains just 2% below the pre-pandemic levels reached in February 2020. At the macro level, the recovery is well underway — even with minor setbacks. It could be just a few more months until things are back to pre-pandemic levels, pending real estate doesn’t drag. 

Canadian Real GDP

Canadian gross domestic product (GDP), adjusted for inflation.

Source: Statistics Canada; Better Dwelling.

Recovery doesn’t mean the economy will be where it was though, due to a reallocation of resources. Canada is now much more dependent on residential real estate than it was (yeah, who knew it was possible?). The increased dependency can turn into a drag very fast if it can’t continue to grow at these levels moving forward.

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Canadian Construction Is Dragging The Economy,  Especially Homebuilding

Construction is one example of residential real estate turning into a drag. The GDP sector fell 0.9% in real terms this past July, the third consecutive monthly decline. It was mostly due to residential construction, which fell 2.7% that month. Considering home building is a big part of construction these days, this is a result of sales slowing.

Construction activity is still an elevated share of GDP, despite the recovery. Including July’s decline, construction now represents 2.95% of real GDP. It’s down from the 3.23% peak it hit in April, but still a fifth higher than it was before the pandemic. The extra 0.45 points or so, came at the cost of spending in other sectors. 

Real Estate Rental and Leasing Is Now Over 13% of GDP

The real estate rental and leasing component of real GDP was mostly flat, but that beats a decline. Real estate rental and leasing advanced 0.06% in July compared to the month before. It was virtually flat, but put an end to the slide for the sector that began in April, continuing to July. 

Canadian Real Estate Rental and Leasing As A % of GDP

The percent share real estate rental and leasing represents in Canada’s GDP.

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Source: Statistics Canada; Better Dwelling.

The real estate rental and leasing sector is now a big share of the economy, and it’s dragging. The sector represented 13.37% of GDP in July — much higher than the 12.83% in February 2020. Not quite the peak level of 14.79% in April 2020, but it occupies a whole extra half point of real GDP. 

Real GDP suffered a mild setback but is still on track to overtake pre-pandemic levels soon. Retaking this level might be perceived as a “recovery” to policymakers, but it isn’t the same on the ground. It’s been an uneven recovery, with areas like the arts and entertainment operating at reduced capacity (and revenue). Real estate has consumed a lot of that household spending, creating a bigger dependence. The more dependent the economy is on real estate, the more difficult it is to grow. People can only upgrade their houses so many times.

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