“In broad terms, residential investment in Canada tends to be a solid driver of economic growth. More recently however, housing activity is turning into more and more of an economic risk,” TD Bank Senior Economist Brian DePratto, wrote in his most recent research not. “To be sure, construction and real estate helped provide support to Canadian growth in recent years as other sectors dealt with shocks, but this has also meant that since 2014, roughly 40% of economic growth has been the result of housing, despite this sector representing between 8% and 10% of overall output.”
That housing-spurred growth is unprecedented, according to DePratto; in terms of housing as an economic driver, current trends outstrip even the fiery peak of the 1980s.
Of course, not all housing markets perform at similar clips and, as DePratto notes, investment in Toronto and Vancouver are main contributors to the country’s overall housing activity.
So where can it go from here?
“Residential investment in Canada may be looking toppish, but that doesn’t mean it must necessarily be at a top,” DePratto wrote. “During the pre-recession period, residential investment in the U.S. hit a new all-time high in each of the eight years before its ‘true’ peak was reached. So then, what is next for Canadian housing?”
While housing may not have finally peaked, it appears a slight correction is in the offing.
“The deck is stacked in favour of a deceleration in housing activity. Stretched home valuations, the slew of cooling measures introduced in the past 12 months, and an expected uptrend in borrowing costs will tap the brakes as the year progresses,” DePratto wrote. “The expected impact can best be seen in price pressures in the key Ontario and Toronto markets. While double-digit price gains are expected this year – due largely to momentum – average home prices are expected to pull back in 2018.”
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Housing activity is turning into a risk, according to one of the country’s largest banks.