How real estate feeds the economy
Think about the Canadian economy for a second. What comes to mind? Oil? Agriculture? Mining? Those things are important, sure, but not
quite as important as real estate. Housing is behind a lot of the country’s
GDP growth over the past few years. First, we need a brief history lesson. Back in 2008 when the global recession hit, the Bank of Canada slashed interest rates
to juice the economy. That lowered the cost of borrowing money—especially
for mortgages. So, Canadians took advantage of cheap rates,
and plunged into the housing market. Real estate and related industries now account
for about one-fifth of the country’s GDP. Other areas of the country’s economy haven’t
been doing so well. The price of oil took a dive a few years ago
and hasn’t really recovered. The manufacturing sector is in trouble for
a lot of reasons, including foreign competition. That means real estate—and just about every
other industry it touches—has been growing faster and with more consistency, than most
other parts of the Canadian economy. It might not be obvious at first, but when
you buy a home, you cross paths with a dozen different professions. First, you need a home
to buy. Building new houses and condos in Canada is a huge business.
Residential construction has outpaced all other forms of construction in the country,
adding about $47-billion to Canada’s GDP. Just look at Toronto.
There are more condo units under construction than at any point since 1990. That keeps a lot of carpenters, plumbers and drywallers in business. Right now, there are more people employed in the construction industry than ever before. Next, you’ll need a mortgage. The country’s
big five banks are more than happy to provide one. Residential mortgages are a healthy profit-centre for the banks, and the size of their portfolios
has ballooned. Each bank holds anywhere from
$100 billion to $200 billion in mortgages. You’ll need home insurance, too, and maybe insurance for the valuable stuff you keep inside your home. That’s good for insurance companies. To actually buy that house, you’ll probably
need a real estate agent, a mortgage broker, a lawyer, and maybe a home inspector. All of these people need to be paid, too. In 2017, the fees associated with buying and
selling real estate hit 1.9 per cent of GDP. That’s an all-time high. Finally, once you move in, you’ve got to
furnish the place. Maybe you’ll buy new appliances, update
the wiring or fix the roof. You could even employ contractors to totally
gut and renovate the place. Once you buy a home, you tend to spend money
on it. That doesn’t really stop, either. When home prices are rising, people feel richer,
and they’re more likely to spend money. That’s called the wealth effect.
Researchers have done studies to find out how strong the link is between rising home
prices and consumer spending. In Canada, it’s fairly strong.
So, as home prices have risen over the past decade, so too has consumer spending. If you own your home for long enough, you
can even use it as an ATM to spend even more money. A home equity line of credit, or HELOC, lets you borrow money against the value of your home. It’s been a very popular loan with Canadians. The value of outstanding HELOC loans
soared 500 per cent since the year 2000 to more than $200 billion. It’s important to remember that while real
estate boosts the economy when times are good, it can really be a drag when things are bad. Everything we’ve just talked about, consumer spending, borrowing, new home construction, can all be pulled down if the real estate market
takes a hit. Given how important housing is right now, let’s hope that doesn’t happen.