Macquarie Group is warning the slowdown in Canadian housing activity may have a material impact on the country's economic growth.
David Doyle, the head of North America economics and strategy at Macquarie, said in an interview Tuesday the decline in existing home sales is likely to weigh on growth through the back half of the year by about one percentage point due to the domestic economy’s outsized reliance on the housing sector.
“I don’t foresee a significant pullback in price imminently, interest rates are likely to remain low, and when the [Bank of Canada] does start to hike, probably will be very gradual in its approach,” he said.
“The bigger headwind comes from activity levels and we’re already seeing some retrenchment in existing home sales volumes. Our math suggests that should subtract one percentage point alone from real GDP growth in both the second quarter and the third quarter, and we’re also seeing some moderation in renovation activity. So, I think this is introducing a headwind to Canada’s economy.”
Canadian existing home sales have been on the decline as the COVID-19 pandemic is showing signs of subsiding and workers return to the office. Home sales, however, remain at elevated historical levels.
Canada's economy has been reliant on housing to prop up growth since the financial crisis in 2007 with nominal residential investment accounting for about 10 per cent of gross domestic product. That’s about double the rate in the United States, and has only been exacerbated by the pandemic-fuelled boom in homebuying and renovation activity.
Doyle said reliance on housing leaves Canada more vulnerable to economic shocks emanating from the residential market.
“It’s difficult to understate how important or how paramount housing has been to the economy and economic growth over the past year and even over the past decade. It has been a significant growth driver for the past 20 years and particularly over the past five or six [years],” he said.
“Then we saw during the pandemic, I would describe it as virtually going on steroids as people were working from home. There was another catalyst on top of an already elevated or stretched housing [market]. It has been one of the sole drivers of growth, not only over the past year but over the last decade.”
That boom in prices has made affordable housing a hot-button issue on the campaign trail with the major political parties rolling out their plans to address overall affordability.
On Tuesday, Liberal Party Leader Justin Trudeau announced the party’s plan to address affordability, including the introduction of a tax-free home savings account for prospective first-time buyers and a pledge to build 1.4 million homes.
That followed Conservative Party Leader Erin O’Toole’s housing plan which pledged to build one million homes over the next three years.
Doyle said that while those plans are intriguing at a policy level, there remains key questions over the actual execution of those lofty goals.
“I think the political parties are floating some interesting ideas out there and I think a lot of it is 'the devil is in the details'. It depends on how it’s implemented and whether or not there’s follow through,” he said.
“We’ve seen the political parties talk about housing and affordable housing in the past and we haven’t seen many results in terms of what’s impacted or how it’s shaped the housing market.”