Thursday, November 24 2022

Canada’s dependence on real estate-led growth will not be easy to break, given that it represents such a large part of the economy. Statistics Canada (Stat Can) publishes annual provincial Real Estate and Rental and Leasing (ERRL) data. RERL is a share of gross domestic product (GDP) from real estate services. Over the past two decades, RER has become a much larger part of the economy. It is now so important in some provinces that as much as 1 in 5 dollars of GDP is generated by the sector.

Real Estate and Rental and Leasing

Real estate and rental and leasing (RERL) are the most direct contribution of industry services to GDP. The sector consists mainly of companies that rent or help sell or buy real estate. This also includes services such as rental or evaluation on behalf of third parties. This is far from a complete tally of the real estate industry’s contribution to GDP. Notable areas excluded are building and construction, or real estate finance. However, these real estate services alone account for a very large share of provincial GDP.

Canada derives 13.5% of its GDP from real estate services

Canada’s real estate industry swallows up the entire economy of the country. Well, it does. The RERL represents 13.5% of GDP in 2021, down slightly compared to 2020 (13.6%). That year, public health restrictions lowered GDP, but not LRRR, so the decline is more of a base effect anomaly. The general trend shows higher and higher growth.

Over the past two decades, LRWR has exceeded the general pace of GDP, accounting for a larger share. The current level is significantly higher than it was in 2010 (12.2%) or 2000 (10.7%). As this share increases, it means that more capital, both human and financial, is allocated to this sector. Trade in non-productive assets now represents 1 for every 7 dollars of GDP, excluding actual housing construction.

Some provinces in Canada get up to 1 in 5 dollars of GDP from real estate trade

As high as the national share is, some provinces are even more dependent. British Columbia leads with 1 in 5 dollars of GDP (19.6%) coming from LRRP. Nova Scotia (17.2%) and Manitoba (14.2%) ranked second and third respectively.

Ontario (13.6%) is just above the national average, but is home to 38.3% of total LRNR activity. High activity in the province has certainly supported national GDP growth. Its slowdown is also likely to act as a drag with credit growth so high and builder activity slowing.

Even provinces with the lowest share still have significant dependency

The provinces with the smallest share of LRDR GDP were still very high. The bottom three on the list are Alberta (11.3%), Saskatchewan (10.3%) and Newfoundland (9.5%). Despite being at the bottom of the list, the share of the real estate services economy is still around 2000 levels.

Canada is extremely dependent on real estate for GDP growth, which raises two major concerns. First, rising interest rates should slow activity. Being highly concentrated in the sector, GDP will generally slow down for many regions. This is one of the problems with being too allocated to one industry.

Second, household debt has increased to maintain this growth. To go further, even more household debt will be needed to support activity. As household debt increases, long-term productive GDP growth slows. This problem becomes systemic and hinders national productivity by diverting investments.

In other words, short-term or long-term pain. But fostering such a large addiction means pain, whichever path you take.


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