Housing accounted for the bulk of Canada’s economic growth last year. Brace for the end of the boom.

“Canada’s long housing boom has drawn thousands into the sector, from realtors and home stagers to construction workers, and a looming slowdown threatens to trigger an exodus that could wipe out many of those jobs and force the economy to shift down.

While housing has long been the main engine of Canadian growth, economists say a drop in home sales has already started to weigh on the economy and if price declines follow, consumer spending and jobs will suffer.

“To a lot of people, it is a get-rich-quick scheme,” Toronto realtor David Fleming said about the real estate market. “But history shows when the market turns, half of the agents leave.”

Realtors’ ranks in Canada’s largest city and hottest housing market have surged 77 percent since 2008 to more than 48,000 – nearly 10 times the pace of Canadian job growth. Nationwide, that number has risen 26.9 percent.

By comparison, there are over 13,500 realtors in Chicago, according to the Chicago Association of Realtors.

With Canadian home construction jobs rising at nearly the same pace as real estate jobs, housing has become the top driver of employment and economic growth, accounting for the bulk of Canada’s economic growth last year.

As the nearly one million housing sector jobs now far outstrip those in oil and gas extraction and mining combined and approach the size of the manufacturing sector, economists brace for a painful reckoning if the housing slowdown turns into a long correction.

More than half of the analysts polled by Reuters in May said a sharp housing correction was somewhat or very likely in Toronto and Vancouver, but unlikely nationally.

Recent data showed nation-wide home resales fell 6.7 percent in June, the largest monthly drop since 2010 and the third straight monthly decline as sales in Toronto tumbled, and sales are expected to slow further as interest rates rise.

While most housing bears have been focusing on how much home prices could drop, economists are also trying to work out how badly a resulting decline in consumer spending and housing jobs could hurt the broad economy. …

Veteran realtors who have seen the industry swell with inexperienced agents have no doubts that a slowdown will decimate their ranks.

“It is definitely overpopulated,” said Shawn Zigelstein, a realtor in the York Region, north of Toronto. “A downturn will weed out of some of those agents who got into the business for the wrong reasons.”

Already, many realtors are struggling in the crowded market. Nearly half of Toronto’s licensed realtors did fewer than two deals last year, according to Brian Torry, general manager at Bosley Real Estate in Toronto. Less than a third did five or more transactions.

“It is a tough industry to break into,” said Jared Gardner, 38, who got his real estate license last year and works in the Toronto area.

Fleming believes many agents are already making less than minimum wage once license, membership and brokerage fees are paid, and it can only get tougher if sales continue to dry up.”

– from ‘In Canada, a nation of realtors braces for the end of the boom’, Reuters, 1 Aug 2017

Mispricing of risk (too cheap money) has caused severe misallocation of resources, with speculators chasing hot sectors and being rewarded for risky behaviour. This has resulted in a ballooning of RE and related activities. Our economy has become overdependent on a concentration of activity, in an unsustainable fashion.
This phenomenon has been clear to some people for many years, yet it has been allowed to continue, encouraged even, because those with any control over monetary policy, the importing of money, or mortgage rates suffer conflicts of interest. The herd has been encouraged to run faster and faster, in one direction, and the imbalance has become more and more extreme.
This will all end. Laws of physics apply here as much as laws of economics – Canada can’t become a giant perpetual motion machine, with most of us doing nothing but selling houses to each other. Once the superficially ‘virtuous’ cycle, fueled by speculation, turns in the opposite direction, and becomes ‘vicious’, this sector collapse, and there will be all sorts of knock-on effects.
There will be great damage, but there will be good consequences, too:
The seemingly intractable housing ‘crisis’, that we now hear about constantly, will greatly benefit from a crash in prices. Housing that is priced close to those prices determined by fundamentals (the actual utility of the property) is healthy for an economy and a society.
– vreaa

10 responses to “Housing accounted for the bulk of Canada’s economic growth last year. Brace for the end of the boom.

  1. “Housing that is priced close to those prices determined by fundamentals (the actual utility of the property) ”

    Can you please tell me how do I price the utility of a property which is used to house satelite family of millionaires? Say if I own a property in Thailand, the price of which is determined to be cheap compared to my other property holdings. How do I determine what the utility price of that property is when it is where my wife and child lives? Actually wait, there is a way, it is called price to income ratio. Except the income here isn’t actually generated in canada hence using CRA numbers is useless. Also why you get the weirdness of having super high housing prices in neighbourhoods that have the lowest incomes.

    Honestly, if you don’t believe me just go to any westside highschool and take a poll of family incomes and where that money is generated. It’s not that hard to figure this out.

    I do agree with what you are saying though that there is a huge social cost of being a resort town where money is not made here. Our best neighbourhoods: Westside, West Van, Coal Harbour, etc. If you ask around, most of them don’t make their money in Canada. It’s like a resort to them.

    • btw, I should add, if you actually did do a price to “real income”, ie, how much the person actually is making globally. It would probably be reasonable to what you expect. It’s just CRA numbers do not reflect the real income.

    • Indubitably, fundamentals do matter – it’s just that in an era of gargantuan trans-national capital flows/mobility, whose fundamentals we’re discussing matter even more…

      • Absolutely agree on that one. The truth is that we don’t really have a way of measuring. In the end I do believe price to income matters and it can’t be ridiculous. But “ridiculous” is dependent on so many factors not to mention that no one really knows what the true “income” that the buyers have. If all buyers make equivalent of local income, then we are screwed. But my experience tells me that the amount of money not made in Vancouver but used in the real estate here is far more than the 3% foreign buyers stat tells us. Because like I said, you can’t have prices on the westside supported by incomes of not even over 50K.

  2. Another thing to add is that the number of locals making large 6 figure salaries is not that rare! I used to think that $100+/year is a pretty decent and maybe in top 10%, if not top 5% of all wage earners. However, now older and talking more people, $100K/yr seems to be pretty much average income of a professional worker and low end at that. Even $150K to $200K/yr seem to be par for the course among professional, and I’m NOT talking about professions like doctors, dentists, lawyers, and C-suite execs, but rather regular IT professionals, team leads, finance, etc. Add self-employed jobs like RE agents, small biz, contractors, massage therapists (legal and illegal kind), physio, trades, consultants, etc, there are a lot of people and family in this town that easily clears like $200K+ to $500K/yr per year! That is a lot of borrowing and purchasing power.

    I don’t think $50K/yr is the average or even a good wage anymore for a full time employed person.

    And just to add some insults in injury, I have heard and personally know people who clears 1M+ RMB/yr AFTER TAX in China and Taiwan working as accountants, SAP consultants, drug salesperson, finance, etc. That’s about ~$200K/yr CAD a year after tax in China where cost of living ex-housing in Tier 1 cities is still very cheap. Heck, a family friend recently bought a 1br condo for $400K+ and friend’s relative in China who is working minimally for like a few thousand RMB/month is thinking about buying here because it is so damn cheap!

    • Vancouver ranks 22nd in Canadian cities for median family income, the most meaningful income measurement statistic. In 2015, the median was $79,930 for Vancouver households. Median income for a bachelors degree in Vancouver is about 42k, vs 62k in Toronto. Many are doing well in Vancouver, but B.C. is a low wage province and Vancouver is a low wage city.

      http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil107a-eng.htm

      • Right, and we all agree that it is largely people who make 42K leveraging themselves to crazy amounts that is not even possible to leverage to who are keeping this market afloat. Right.. it makes perfect sense to me…

      • Yes, I am aware of that statistics. However, when almost everyone you know makes far more than that, it’s hard to believe the statistics. I would be curious as to what the median wage is for full-time working people, especially say 5 years after graduation.

        $45K is what I made fresh of university in the tech depression of 2001, and it was already like 10% to 20% lower than 2000 when most of my classmates graduated. I have been told that new IT grads are getting $70K / $80K to $100K offers from Amazon, MS, etc to work in Vancouver. NEW GRAD! Not PhD or Masters but Bachelor people!!

  3. “Dismal David” Madani – what a pill. Financial fentanyl for fence-sitters.
    The rodent above blowing it out his hole that too many are going into the business for the wrong reasons … the right reasons being … what? What a pile. Overpopulated with rodents? That’s true. Whacked one in a rat trap in the back yard yesterday. If 95% of rodents vaporized, there would still be too many. The real estate model is broken – an anachronism long overdue for disruption.
    The bimbo who “sold” my neighbour’s house going on 3 years ago hasn’t had a listing since. In the hottest market ever, she beat him down on price mercilessly; flicking her hair and pouting. How did he dig up this prize? A “friend”. Not any more.
    Anthony Bourdain compared Shanghai to New York and Chicago. Said the latter two were like a third world country. Were it not for the vested interests here, the pace of growth would hit warp drive.

  4. But seriously population is growing and we need moar housing. Also moar transportation and amenity infrastructure

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