Dave’s comments are addressed to the whole of Canada. In Vancouver, this effect is even more exaggerated. What will sustain economic activity here when the bubble bursts? -vreaa
“Based on our statistical work, around half of the 7% annualized growth rate in nominal GDP from the recession trough has been due to the combined direct and indirect benefits from the housing boom. And, when we apply the price deflators to the various sectors of GDP, we actually find that every penny of economic activity, in real terms since this recovery began, has occurred thanks to the housing sector. In other words, if not for housing real GDP would have stagnated since Q2 2009 instead of rebounding at a 3% annualized pace.
Now that we have ascertained the root cause of this economic revival, it pays to assess what the driving factors were behind this real estate surge. No doubt the Bank of Canada’s move exactly a year ago to cut the policy rate to a mere 25 basis points was a huge factor — not to mention the pledge to keep the rate low through mid-2010. And, knowing the expiry date, a tremendous amount of housing activity was brought forward as a result.
The aggressive move to ease CMHC guidelines was equally stimulative. For a good while, Canadians could secure a microscopic interest rate with a 40-year amortization mortgage with practically no money down. What a great deal! The government announced some tighter rules a few months ago, but like the Bank of Canada’s pledge, the new CMHC guidelines did not begin until now, so again activity was pulled forward. This impact of “borrowing activity from the future” will likely be accentuated by Ontario’s and B.C.’s move to harmonize their sales taxes with the federal government this July.
So the housing market in Canada, the goose that laid the golden egg for the broader economy, is now going to be operating without the crutch of massive government support. It will be fascinating to see how this all plays out, especially since so much housing demand has already been filled by all the frenetic activity over the course of the past year. With all of the real growth in the economy since last summer being derived from the residential real estate market, it’s legitimate to ask: who exactly will be picking up the baton?”