We do in fact live in unique times. While we can disagree on exactly what the future holds for real estate in Canada and what implications (if any) this may have on the economy, we can not disagree on certain facts.
With that in mind, let’s take a look at a handful of anomalous economic phenomena relating to real estate and its impact on the Canadian economy. My firm belief is that it is in fact not different this time and that there will be an eventual reversion back to the long-term mean in each metric we will examine. This is not to say that the dislocation cannot persist for some time, even years potentially, or that it can not in fact get larger, but that eventually it will revert. I’ll offer my suggestions on how this might affect the economy and job market.
Home renovations as a percentage of GDP
Perhaps it’s symptomatic of our collective addiction to HGTV house porn. Perhaps it is the constant flow of tax credits aimed at promoting renovation. Regardless, I will suggest (and it is supported to a degree by CAAMP data) that this increase in renovation as a percent of GDP is highly correlated with the growth in home equity extraction via HELOCs. My guess is that in the event of a significant housing correction, as HELOC growth slows or even turns negative as it has in the states, there would be a sharp reversal in renovation activity which alone could strip the better part of a full percentage off GDP growth for several years.
Percent of GDP derived from residential construction
We see that the percentage of GDP derived from residential construction is well above its long term trend line and is sitting near the highs reached before the last great housing bust in the late 80s. Unfortunately this data set ends in 2008, so it is not particularly useful in measuring the current level of GDP derived from residential construction. I will see if I can fill in the gaps at some point. Certainly we would expect a sharp pullback in 2009 followed by a strong rebound in 2010, but just where those data points sit is entirely a guess.
Nevertheless, if we assume that GDP will revert back to its trend line over several years, we see a drag of as much as a third of a percentage point on GDP each year.
Construction jobs as a percentage of total employment
The graph nicely explains itself here. Construction accounts for over 7% of the total labour force, a full percentage point above its long term trend line and currently at historic highs only matched in late 2008. A reversion to the trend line would involve the loss of nearly 200,000 jobs from the Canadian economy. This has been a constant criticism of mine with regards to the ‘rebound’ in employment from the recession lows. It has overwhelmingly been driven by growth in construction jobs, public sector jobs, and part time jobs…..not overly impressive.
Of course, the true number of lost jobs mentioned above would be multiple times higher in the event of a significant real estate correction as consumer spending fueled by consumer debt growth, itself primarily fueled by a rise in HELOCs, would be choked off.
Hopefully tomorrow we’ll begin a two part series exploring provincial data in an attempt to view any potential housing bubble through several metrics such as the change in GDP derived from construction by province, the change in housing starts per 10,000 and the change in construction jobs as a percentage of total employment.
Cheers for now,