Big bank forecasts housing downturn

How bad will it be, and what will it mean for the economy as a whole?

Luckily, not nearly as impactful as recent housing crashes.

“We don’t expect a downturn similar to that recorded in the early 1990s or even in the United States leading up to the financial crisis,” Laura Cooper, RBC economist, wrote in a recent economic report. “But after Canada’s years-long housing-market party, a mild hangover is likely to follow, with important implications for Canada’s overall economy.”

In the report, entitled How vulnerable is Canada’s economy to a housing downturn? Not enough to shake the foundation, Cooper examines the impact housing has had on the economy recently.

Residential investments accounted for 7.7% of GDP at the end of 2016, which led to an improved economic forecast from the Bank of Canada.

“But the boost came with a warning that the pace of activity in Toronto and surrounding areas is becoming increasingly unsustainable given economic fundamentals,” Cooper wrote. “On the back of recent government intervention, it would be prudent to take stock of the role that housing-related activity has played in supporting overall economic growth in Canada—and to gauge how a downturn in home sales could impact the broader economy.”

According to Cooper, 5% of the economy is exposed to a home sales decline.

“Tallying up the contributions of everything from the building of new homes to the costs of maintaining and running a home, housing-related expenditures climbed to a record 25% share of the Canadian economy in 2016,” Cooper wrote. “Not all of this activity is vulnerable to a downturn in home sales. Close to 15% of the economy has a degree of exposure to a drop in home sales, but only 5% has a strong relationship (close to 1:1 for ownership transfer costs and new home construction).”


Related stories:
Big banks are freaking out about Toronto real estate
Amid higher house prices, rising indebtedness ‘worrisome,’ central bank official says

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COMMENTS

  • by Mr. Bigglesworth 2017-05-03 2:52:09 PM

    Hi Justin,
    I'm surprised to hear you write about an impending downturn as a fait accompli.
    A few things come to mind., that I'd like to offer to our fellow readers, by way of an dissenting opinion..good to have perspective, right?

    1) Much as hedge funds and other institutional traders can short a stock or commodity, and then "talk it down", there exists a similar potential with "expert's" incessant warnings about "the" coming crash/correction/downturn. It's like Trump uttering his misinformed and untruthful tweets and sound bites, which, ( absent any intellectual cognition on the part of his listeners, which is typically the case), can in time, and with enough repetition, assume something akin to "the truth". (forget about the Russians; THIS is how he convinced enough of the Great Unwashed victims of their own stupidity to vote for him). The repetition of lies, no matter how fanciful, can sway enough people as to believe that such an event/consequence is inevitable, and that, in itself, can play a significant part in the precipitation of the otherwise improbable thing itself...so absent any insider information that a tanking is coming, it might be prudent to dial down the rhetoric...if we'd all believed this pessimism at any time in the last several years that it has been foretold by the "experts", we'd all be significantly poorer today.

    2) Having been generously invested/interested in the national housing industry, (as are most readers of this website), a couple of things become clear after 30-ish years of participation: One is not to listen to "experts". There are no experts: just people, just like you and me, that have an opinion...some are learned, some are Trumpian . Notice that the "experts" calling for an imminent downturn/crash/correction...never say WHEN, or HOW SEVERE, or what the triggers will be. Thus, they amount to vague notions of probability, based on their reading of the economic and demographic tea-leaves. Hardly the stuff on which to base any sound buying/selling decisions. Nor do they put their money where their mouth is...just making dramatic proclamations from the safety and anonymity of the web. you will find very few people who heed ANY of the "sky's gonna fall" mentality that we have been reading about, even on this website, for a long time now. For the very few who did, ( one poor chap i know actually did: he sold his penthouse in our building for about 1.08m 18 months ago; its worth about 1.3 now, but is undergoing reno's, and will be 1.5-1.6, easy, in a couple of months. This scientist bought gold, instead of Vancouver real estate. and we all know how daft that was/is). so now he rents, has lost about .3m, can't buy back into this sweet little pocket in Vancouver's WestSide, and pissed his wife off severely...plus flat-lined his gold play. nice going, H.O.!) . But he read the pundits drivel and BELIEVED IT. not just the housing "experts", but the financial "experts", too, to be fair. But he's probably still happy Trump got in...but i digress again..

    3) the "experts" calling for significant corrections to sales/prices in various/specific markets in Canada ignore several factors that will ensure these markets, (well, maybe not the Maritimes, or Manitoba), remain strong: the biggest, by far, is the fact that the more the word gets out, the more the world will beat a path to our door(s). The more the rest of the world deteriorates into dystopian ruin, the more Mr Xi and the NPC squeeze our chinese friend's freedoms, (um, name one that isn't being squeezed), the more Europe loses its battle with the Right, (looks like Marcon will win this round, but the road is a long one, and Mohammad's wolves are at the door)...the more Trump spoils america, and the older the 'Boomers get, for the next 15-20 years, anyway, the more attractive a Liberal Canada will look...hell, even a Conservative one, but thanks to that star-studded lineup of muppets on the conservative ledger, theres not much hope there...so sunny ways, sunny days. ..further, with our weak currency, stable government, and international reputation as a stalwart of inclusiveness and liberal democracy, (cue the Canada Day gender-neutral anthem!), the more we will be seen as a safe haven/respite for people and wealth. The asian-invasion of the last decade illustrates this, and if anybody truly believes that that demand doesn't still exist, despite local initiatives to curb it.....there are more reasons to be a believer, bit you can find your own, which should be doing anyway, rather than listening to some guy who names himself after Dr. Evil' s cat.

    4) housing is at the top of nearly every political candidates agenda now..civic, provincial...will anything be done? not enough to put a dent in supply-side numbers. Will the pent-up demand disappear? clearly not: its just on the sidelines, and offshore, waiting....and its massive. I'm not proclaiming prices will double in the next 5 years, as they did in the last 5 (check out chpc.biz), but its my quietly held belief that theres still surprising upside potential, and more importantly, strong and growing fundamentals that will bolster the markets for years to come. Sure, macro-economics can torpedo the best scenarios, but consider this extremely important point...on the back of every Andex Chart is a litany/history of reasons NOT to invest in (anything, really), at that particular moment in time...wars, pestilence, famine, Trump...all the usual "disasters"...at any time, there were/are reasons. right now is one of those moments. The "experts"are yelling that the market is about to tank, and like any good short-player, we should get out now... but look at the front side of that same index chart, to see what the consequences of bailing out, would have been. ..think todays any different?.. then you better liquidate. (let me know what you've got.!.)...but you won't, because the signs are all around you that i am...sales volumes are down, prices remaining strong...what does that tell you?...the smart money isn't buying the "experts" rants. Sure, there may well come a correction, inevitable, really, as any perusal of the aforementioned Andex chart will clearly illustrate, but thats just a buying opportunity, and a shakeout of the marginal players... nothing more..

    ..so don't believe the "experts", because they are not.
    ... don't short this market, but be long in it, and you won't get hurt, or piss off your wife.
    ....dont over-leverage yourself, but think big: think small, and thats exactly what you get in life.
    ...and again, don't listen to "experts"....

  • by Mr. Bigglesworth 2017-05-03 2:57:09 PM

    Hi Justin,
    I'm surprised to hear you write about an impending downturn as a fait accompli.
    A few things come to mind., that I'd like to offer to our fellow readers, by way of an dissenting opinion..good to have perspective, right?

    1) Much as hedge funds and other institutional traders can short a stock or commodity, and then "talk it down", there exists a similar potential with "expert's" incessant warnings about "the" coming crash/correction/downturn. It's like Trump uttering his misinformed and untruthful tweets and sound bites, which, ( absent any intellectual cognition on the part of his listeners, which is typically the case), can in time, and with enough repetition, assume something akin to "the truth". (forget about the Russians; THIS is how he convinced enough of the Great Unwashed victims of their own stupidity to vote for him). The repetition of lies, no matter how fanciful, can sway enough people as to believe that such an event/consequence is inevitable, and that, in itself, can play a significant part in the precipitation of the otherwise improbable thing itself...so absent any insider information that a tanking is coming, it might be prudent to dial down the rhetoric...if we'd all believed this pessimism at any time in the last several years that it has been foretold by the "experts", we'd all be significantly poorer today.

    2) Having been generously invested/interested in the national housing industry, (as are most readers of this website), a couple of things become clear after 30-ish years of participation: One is not to listen to "experts". There are no experts: just people, just like you and me, that have an opinion...some are learned, some are Trumpian . Notice that the "experts" calling for an imminent downturn/crash/correction...never say WHEN, or HOW SEVERE, or what the triggers will be. Thus, they amount to vague notions of probability, based on their reading of the economic and demographic tea-leaves. Hardly the stuff on which to base any sound buying/selling decisions. Nor do they put their money where their mouth is...just making dramatic proclamations from the safety and anonymity of the web. you will find very few people who heed ANY of the "sky's gonna fall" mentality that we have been reading about, even on this website, for a long time now. For the very few who did, ( one poor chap i know actually did: he sold his penthouse in our building for about 1.08m 18 months ago; its worth about 1.3 now, but is undergoing reno's, and will be 1.5-1.6, easy, in a couple of months. This scientist bought gold, instead of Vancouver real estate. and we all know how daft that was/is). so now he rents, has lost about .3m, can't buy back into this sweet little pocket in Vancouver's WestSide, and pissed his wife off severely...plus flat-lined his gold play. nice going, H.O.!) . But he read the pundits drivel and BELIEVED IT. not just the housing "experts", but the financial "experts", too, to be fair. But he's probably still happy Trump got in...but i digress again..

    3) the "experts" calling for significant corrections to sales/prices in various/specific markets in Canada ignore several factors that will ensure these markets, (well, maybe not the Maritimes, or Manitoba), remain strong: the biggest, by far, is the fact that the more the word gets out, the more the world will beat a path to our door(s). The more the rest of the world deteriorates into dystopian ruin, the more Mr Xi and the NPC squeeze our chinese friend's freedoms, (um, name one that isn't being squeezed), the more Europe loses its battle with the Right, (looks like Marcon will win this round, but the road is a long one, and Mohammad's wolves are at the door)...the more Trump spoils america, and the older the 'Boomers get, for the next 15-20 years, anyway, the more attractive a Liberal Canada will look...hell, even a Conservative one, but thanks to that star-studded lineup of muppets on the conservative ledger, theres not much hope there...so sunny ways, sunny days. ..further, with our weak currency, stable government, and international reputation as a stalwart of inclusiveness and liberal democracy, (cue the Canada Day gender-neutral anthem!), the more we will be seen as a safe haven/respite for people and wealth. The asian-invasion of the last decade illustrates this, and if anybody truly believes that that demand doesn't still exist, despite local initiatives to curb it.....there are more reasons to be a believer, bit you can find your own, which should be doing anyway, rather than listening to some guy who names himself after Dr. Evil' s cat.

    4) housing is at the top of nearly every political candidates agenda now..civic, provincial...will anything be done? not enough to put a dent in supply-side numbers. Will the pent-up demand disappear? clearly not: its just on the sidelines, and offshore, waiting....and its massive. I'm not proclaiming prices will double in the next 5 years, as they did in the last 5 (check out chpc.biz), but its my quietly held belief that theres still surprising upside potential, and more importantly, strong and growing fundamentals that will bolster the markets for years to come. Sure, macro-economics can torpedo the best scenarios, but consider this extremely important point...on the back of every Andex Chart is a litany/history of reasons NOT to invest in (anything, really), at that particular moment in time...wars, pestilence, famine, Trump...all the usual "disasters"...at any time, there were/are reasons. right now is one of those moments. The "experts"are yelling that the market is about to tank, and like any good short-player, we should get out now... but look at the front side of that same Andex chart, to see what the consequences of bailing out, would have been. ..think todays any different?.. then you better liquidate. (let me know what you've got.!.)...but you won't, because the signs are all around you that i am...sales volumes are down, prices remaining strong...what does that tell you?...the smart money isn't buying the "experts" rants. Sure, there may well come a correction, inevitable, really, as any perusal of the aforementioned Andex chart will clearly illustrate, but thats just a buying opportunity, and a shakeout of the marginal players... nothing more..

    ..so don't believe the "experts", because they are not.
    ... don't short this market, but be long in it, and you won't get hurt, or piss off your wife.
    ....dont over-leverage yourself, but think big: think small, and thats exactly what you get in life.
    ...and again, don't listen to "experts"....

  • by Zahid 2017-05-03 6:13:06 PM

    I am not surprised with the usual misleading headline. Seems REP still doesn't read and understand

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