Canadian real estate is back to swallow the economy and deflect investment

Canada’s economy was briefly less dependent on real estate, but that was short-lived. Data from Statistics Canada (Stat Can) shows that residential investment exceeded GDP in the fourth quarter of 2021. As a percentage of GDP, residential investment is below last year’s record, but is growing rapidly. An increased reliance on real estate is a trend that began over two decades ago. Since then, residential investment has diverted capital from more productive uses.

Residential investment in Canada increased by 15.7%

Investment in Canadian residential structures hit a new record high in the last quarter. The seasonally adjusted annual rate (SAR) of residential investment reached $248.2 billion in the fourth quarter of 2021. This is an increase of 6.61% from the previous quarter and 15. 7% compared to the previous year. If you’re even slightly familiar with GDP, you’ll notice that growth is overrepresented.

Residential investment picks up faster than GDP

The share of investment in residential structures in relation to production increases again. In the fourth quarter of 2021, residential investment represented 9.6% of GDP, compared to 9.3% in the previous quarter. It was also at the same level a year earlier and reached a record 10.23% in the first quarter of 2021. A decline from the record share of GDP, but it has already returned to an upward trend.

Canadian real estate has diverted capital from other uses

Canadians will often say that there is no better investment than real estate, and there is. It’s a big problem when people see little reason to invest in anything other than housing. For example, let’s look at the growth of machinery and equipment (M&E). Sound investments in this area are a precursor to expanding economic output.

Canadian residential investment and M&Ms as a percentage of GDP

The share of gross domestic product (GDP) coming from investment in housing (residential investment) and investment in machinery and equipment.

Source: Statistics Canada; Live better.

M&E as a share of GDP fell to 2.98% of GDP in the fourth quarter of 2021, from 3.30% a year earlier. Looking at the chart above, we can see that M&E peaked in the mid to late 90s. This was shortly after the last housing crash, as the economy was recovering.

Since then, Canada’s economy has become increasingly dependent on residential construction. Earlier this year, the share of GDP spent on building new homes exceeded business investment for the first time since the 1960s. The claim that Canada is doing everything for real estate has never been so true.

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