Softer real estate activity won’t hurt the economy: CIBC

by Neil Sharma on 29 Jul 2021

The Canadian economy isn’t as reliant on the real estate market as you might think.

So says a report from Royce Mendes, executive director and senior economist at CIBC Capital Markets, who reminded that residential real estate investment comprises construction and renovations in addition to “ownership transfer costs,” the latter of which still accounted for the bulk of economic activity. And while softening market activity will cause “this component of GDP to come back down to earth,” other sectors of the economy are awakening from their long pandemic-induced slumbers.

“The reopening that is underway also seems to be coinciding with a slowdown in other components of residential investment, such as construction. But, by that same token, companies not doing business in the housing market are also feeling more confident about making investments rather than stockpiling cash, given that vaccinations have reduced the likelihood of another round of harsh shutdowns,” said the report.

“If so, it would see the abnormal negative correlation between housing and business investment continue for a little while longer. But, keep in mind, that a fall in residential investment will not cause a rise in business investment, it’s still that other variable driving both: the pandemic.”

For its part, the Bank of Canada stated earlier this month that the country’s economy will grow at a slower-than-expected pace this year—it forecasts 6% growth, down from its previous estimate of 6.5%—and anticipates 4.6% growth in 2022, up from its initial projection of 3.7%.

The central bank added that with the easing, even rescission, of COVID-19-related health restrictions, consumer spending would increase. With travel prohibited, restaurants shut and major sporting events closed to spectators, Canadians’ non-essential outlays decreased during the pandemic, resulting in households saving an estimated $200 billion of cash, which is just waiting to be unleashed into the economy.

The Bank of Canada does not believe the end of federal aid programs will adversely impact consumer spending since more people will be returning to work with the end of the pandemic in sight.

“The reopening of the economy and the strong progress on vaccinations have given us reason to be more optimistic about the direction of the economy,” said Bank of Canada Governor Tiff Macklem during a July 14 press conference. “But we are not there yet, and we are mindful that the process is likely to be bumpy, and some scars will remain.”

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