No Surprise: The Residential Real Estate Complex a Big Economic Engine in BC
Real estate sales have been running at record levels across the lower mainland, and home prices are surging. In response to elevated demand, new home construction has jumped to its highest level since the early 1990s. Renovation spending has also been strong. Casual observation and “water cooler chatter” speak to widespread media and public interest in real estate generally -- and housing prices in particular. In this setting, it will not come as a surprise that the data tracking economic output by sector confirms that real estate-related activity has become a critical factor underpinning economic growth in the province.
Statistics Canada produces data measuring real GDP, or the final value of economic output, for different industries, for each province. This information allows analysts to calculate the rate of real economic growth for specific industries, or clusters of linked industries. To get a sense of housing’s contribution to overall economic growth in British Columbia, the various industries measuring housing-related activity are added together. Based on this, in what follows we compute the growth of output in the “housing complex.” We then subtract the housing-related components from economy-wide GDP growth to get an idea of how strong economic growth in BC would be without housing.
Using Statistics Canada’s industry structure, output in the residential construction industry (which includes renovation spending), the offices of real estate agents and brokers, and what Statistics Canada categorizes as “owner-occupied imputed rent” can be added together to approximately measure the size of what we call the “housing complex” in total GDP. Output in all three of these direct housing-related segments grew faster than the BC economy as a whole last year. In fact, GDP in the “offices or real estate agents and brokers” industry soared by 23%, making it BC’s fastest growing industry in 2015. Output in the residential construction sector expanded by about 9%, on the heels of a similar gain in 2014. The third industry included as a direct part of the housing sector is harder to understand. “Imputed rent” is Statistics Canada’s attempt to gauge the value of output derived from owner-occupied dwellings. To make value-added arising from the use of residential real estate invariant to changes in ownership, homeowners are considered to be landlords renting houses to themselves. Thus, this “industry” is meant to measure the imputed amount of such rents. It is a large industry in Statistics Canada’s economic framework, accounting for nearly 12% of total GDP in British Columbia.
In 2015, the BC economy expanded by 3.0%, after inflation. What we call the direct “housing complex” (the three industries collectively) grew by 6.0%, twice as fast as the total economy. Subtracting the “housing complex” from aggregate economic output, real GDP in the rest of the BC economy increased by a more modest 2.4% last year. In sum, Statistics Canada’s estimate of housing’s direct impact on GDP indicates that real estate and residential construction lifted BC’s economic growth rate by six tenths of a percentage point in the most recent completed calendar year.
Source: Statistics Canada, TD Economics.
Output growth in the same grouping of residential real estate-related industries in other provinces was more muted than in BC. Ontario, fuelled by Greater Toronto’s busy housing market, saw output in the “housing complex” expand by 4.4%, compared to 6.0% for BC. In most other provinces, real GDP in the “housing complex” grew by less than 2.0% (in Saskatchewan and Newfoundland & Labrador, the housing sector actually detracted from overall economic growth in 2015).
Source: Statistics Canada, TD Economics.
The above measure of growth in the broad housing sector does not capture the full impact of housing on the economy – or on GDP growth. It is an approximation of the direct contribution that housing makes to changes in real GDP. When one considers the indirect contributions of housing, it is apparent that housing-related activity carries even more economic weight, especially in British Columbia. For example, in the BC retail industry, segments linked to housing have been posting exceptionally robust sales gains. Retail outlets in the building materials and garden equipment and supplies segment saw sales soar by almost 20% last year, with a further 17% bump in the first four months of 2016. And sales at BC furniture and home furnishings stores were up 11% last year.
Indeed, large numbers of people working in BC industry sectors directly or indirectly linked or exposed to housing have been seeing healthy income gains. This covers a wide range of occupations, including realtors, mortgage brokers, property lawyers, appraisers, home inspectors, architects, contractors, tradespeople, landscapers and so on. Today in BC, many people owe their livelihood to a frothy housing sector.
Source: Statistics Canada, TD Economics.
Finally, there is also the “wealth effect” that occurs when homeowners experience big gains in the value of their properties, as has happened in most urban areas of BC in the past couple of years. The impact of this is difficult to quantify, but a positive wealth effect undoubtedly is buoying consumer sentiment and leading to more spending by homeowners who have seen their net worth increase by multiple hundreds of thousands of dollars owing to escalating housing prices. More BC homeowners are realizing these gains by selling their houses in Metro Vancouver and downsizing or moving to smaller communities. In other cases, homeowners are tapping into fast-rising home equity to finance other purchases, such as automobiles, recreational property, and boats, or to invest in upgrading their houses. In our judgement, the wealth effect and the associated lift to housing related incomes and employment is an important factor supporting retail sales in BC, including the 11% increase in sales at auto dealers last year (with a further 12% gain so far this year).
Add it all up, and it’s clear that housing is playing an outsized role in BC’s economy, and is perhaps the main reason for the comparatively high rates of GDP and employment growth reported since 2014. If all of the linkages and indirect impacts of housing-related spending could be traced and counted, we would not be surprised if the “housing complex” was now responsible for ~40% of economic growth in British Columbia. While the housing boom in some ways is a good news story for the province, the risk of a housing slowdown (or downturn) must be taken seriously, as it would have a dampening effect on the broader economy. At the same time, a housing market correction, should one occur, would deliver a blow to the net worth of BC households, and quickly push sizable numbers of homeowners into financial distress. The hot housing sector, while boosting the economy today, is creating a somewhat unbalanced economic growth dynamic in the province. It also leaves BC vulnerable to potentially adverse market shifts.