In an August 18 analysis for The Globe and Mail
, columnist Konrad Yakabuski noted that the record-breaking heights reached by the real estate segment on a nearly monthly basis have essentially made Canada solely dependent on the sector.
“Canada is now a real estate nation, with little else to keep the economy from sinking into an even deeper funk. Gross domestic product shrank 0.1 per cent in May, and that’s after excluding the negative impact of Alberta’s wildfires on oil sands output. Yet, we’re still buying houses like there’s no tomorrow,” Yakabuski wrote.
Yakabuski pointed out that real estate’s share of the Canadian GDP has risen by 0.4 percentage points just in the past two years, and by 35 per cent since a decade ago. Meanwhile, all other industries (including the once-central oil and manufacturing segments) have contracted.
“When you tack on to all those real estate fees the financial services that are bought and sold as part of real estate transactions, and the home renovations undertaken by prospective sellers or those unable to trade up to bigger or better houses as a result of surging prices, and it’s not going out on a limb to suggest that the sector has grown too big for the country’s own good,” Yakabuski argued.
And in a departure from the growing chorus of thought pieces pointing at wealthy foreign nationals as the cause of the inflamed prices in Canadian housing, the columnist put the blame solely on ill-advised demand-side measures crafted by policy makers.
“Not only have low interest rates and restrictive land-use policies created an affordability crisis by driving prices for detached homes through the roof, any sudden reversal of those policies would take the floor out of the market,” Yakabuski explained.
“Restrictive land-use and densification policies in B.C.’s Lower Mainland and Ontario’s Greater Golden Horseshoe, on top of development fees and bureaucracy, have made it extremely difficult and costly to build single-family detached homes,” he added. “If prices do start to fall, even moderately, buyer psychology will shift rapidly and a reverse wealth effect will set in. A real estate crash (which bypassed Canada during the last recession) could become a self-fulling prophecy.”
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The increased importance of real estate in the Canadian financial system has made the latter especially vulnerable to factors that threaten to upend the housing markets, with no other buffer or fallback in the worst-case scenario.