Big bank forecasts housing downturn

How bad will it be, and what will it mean for the economy as a whole?

Luckily, not nearly as impactful as recent housing crashes.

“We don’t expect a downturn similar to that recorded in the early 1990s or even in the United States leading up to the financial crisis,” Laura Cooper, RBC economist, wrote in a recent economic report. “But after Canada’s years-long housing-market party, a mild hangover is likely to follow, with important implications for Canada’s overall economy.”

In the report, entitled How vulnerable is Canada’s economy to a housing downturn? Not enough to shake the foundation, Cooper examines the impact housing has had on the economy recently.

Residential investments accounted for 7.7% of GDP at the end of 2016, which led to an improved economic forecast from the Bank of Canada.

“But the boost came with a warning that the pace of activity in Toronto and surrounding areas is becoming increasingly unsustainable given economic fundamentals,” Cooper wrote. “On the back of recent government intervention, it would be prudent to take stock of the role that housing-related activity has played in supporting overall economic growth in Canada—and to gauge how a downturn in home sales could impact the broader economy.”

According to Cooper, 5% of the economy is exposed to a home sales decline.

“Tallying up the contributions of everything from the building of new homes to the costs of maintaining and running a home, housing-related expenditures climbed to a record 25% share of the Canadian economy in 2016,” Cooper wrote. “Not all of this activity is vulnerable to a downturn in home sales. Close to 15% of the economy has a degree of exposure to a drop in home sales, but only 5% has a strong relationship (close to 1:1 for ownership transfer costs and new home construction).”

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