Canada’s real estate industry has seen a smaller impact than the general economy during the pandemic. Statistics Canada (Stat Can) data shows residential investment fell in Q2 2020. The drop was smaller than the one GDP made though, meaning the economic dependency on real estate grew. At least for the next few months.

Residential Investment

Residential investment is residential real estate’s direct contribution to the economy. It includes the construction of new houses, major renovation, and ownership transfers, but it’s important to remember it’s not a comprehensive measure. For instance, renovations don’t cover superficial renos or routine maintenance. Roofs are in, but painting the baby’s room isn’t. Ownership transfer costs include things like agent commissions and lawyer fees. Real estate is a much bigger contributor to the economy, and this is just the most direct measure. For example, insurance and finance are also largely dependent on real estate, but are independent segments.

Drops in residential investment are considered red flags for the economy. Research from Norway’s central bank notes drops in residential investment precedes a recession. Countries with high rates of ownership, like Canada, tend to have the strongest link. Countries with low rates of ownership, like Japan, have the weakest link. Often people think a slowdown in new building is just the end to an overheated real estate market. In reality, it’s a sign of other issues throttling the investment into this area.

Canadian Residential Investment Drops Over 11%

Residential investment made a small increase on the quarter, but is down from last year. The total estimate is $39.24 billion in Q2 2020, up 1.87% from the previous quarter. This is a 11.36% decline compared to the same quarter last year. While the decline is large, it was smaller than the one gross domestic product (GDP) made.

Canadian Residential Investment

The amount spent on residential stuctures in Canada.

Source: Stat Can, Better Dwelling.

GDP made a sharp (and expected) decline last quarter. The number came in at $484 billion unadjusted in Q2 2020, down 10.52% from the previous quarter. This represents a decline of 14.70% compared to the same quarter last year. Since the drop for GDP in general was larger than the decline for residential investment, the economy became more dependent on real estate.

Residential Investment As A Percent of GDP Increased To 7.48%

Residential investment as a percent of GDP is still trending lower, but it’s significantly higher than last year. Residential investment as a percent of GDP reached 7.48% in Q2 2020, up from 7.25% last year. While it’s a significant climb, it’s still much lower than the record high of 8.69% hit in Q2 2016. Short-term it’s an increase, but on a longer horizon there’s still a downtrend.

Residential Investment As A Percent of GDP

The amount of Canadian residential investment, expressed as a percent of GDP.

Source: Stat Can, Better Dwelling.

Canadian residential investment is lower in dollar terms, but not dropping nearly as fast as GDP. This is printing a short-term increase in the dependency ratio. However, many of the factors that dragged GDP lower in Q2 are being considered temporary. As the economy returns to normal, the ratio of residential investment as a percent of GDP should continue its downtrend. In the meantime however, the country is getting a little more dependent on real estate.

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This content was originally published here.