Canadian real estate prices are rising, but investors are quietly pulling back. In fact, they’re withdrawing their capital at one of the fastest rates in history. Statistics Canada (Stat Can) data shows residential investment dropped sharply in Q3 2021. This is the component of GDP that covers real estate’s most direct economic output. The GDP component recently printed a record, but falling home sales and delayed projects have it spiraling lower.
Canada Spends More Than A Third Of Its Investment Capital On New Housing
Canada’s investment in residential structures showed one of the sharpest declines in history. Seasonally adjusted investment fell to $231.2 billion in Q3 2021, down 7.1% ($17.7 billion) from the previous quarter. That second quarter had been the record high for investment in dollar terms.
The (sorta) good news is fixed capital formation, a measure of total GDP investment, didn’t fall as fast. Residential investment is 39.8% of gross fixed capital formation in Q3 2021. This is a decline of 2.4 points from the previous quarter, underperforming the economy. It peaked in Q1 2021, and the share is now 2.9 points lower from that peak. Canada’s dependence on real estate is starting to loosen, though it’s still very high.
Residential Investment Has 3 Major Subcomponents
Let’s go over where this weakness is coming from by looking at the three big subcomponents. Renovation, the biggest of the subcomponents, is the capital spent on major home renos. New construction is the second biggest and shows the amount of capital sunk into new housing. Ownership transfer costs are the smallest and represent costs associated with trading homes. This is primarily realtor commissions, known as broker revenues. All three segments showed weakness in the most recent data.
Investment For New Housing Made The Sharpest Drop Since 2009
New housing investment is the largest share of residential investment, and it slipped. The segment fell to a seasonally adjusted $102.7 billion in Q3 2021, down 2.6% ($2.8 billion) from the previous quarter. This would be the most significant drop since the beginning of public health measures.
Stat Can made a special note about this segment in regards to the size of its drop. When adjusted for inflation, investment in new housing construction fell 5.7% in Q3. Their analysis shows this is the largest drop for the segment since 2009 — the Great Recession. It really emphasizes the enormous role inflation is playing in this environment…read more.
