Just how important is the housing market to the Canadian economy? According to a recent report by Willing Dunning, Chief Economist for the Canadian Association of Accredited Mortgage Professionals, the Canadian housing market accounts for nearly 8% of total Canadian employment. That’s nearly 1.35 million direct and indirect jobs.
The report also shows that the mortgage industry plays a particularly important role in job creation. According to the data released in the report, it’s estimated that 18% of all job creation in the last five years has occurred as a direct or indirect result of growth in the housing and mortgage sectors.
Not surprisingly, rising home values lead to increased consumer spending, which results in a stronger economy. But what happens when values reach their max?
The Housing Effect
Job Creation
In order to understand the ramifications of a shift in the Canadian housing market, we must first understand how the market impacts job growth. According to the 2006 Census, nearly 280,000 people were employed in “residential building construction” or approximately 1.7% of total employment. Approximately 96,000 persons were employed in “offices of real estate agents and brokers” while an additional 47,000 were involved in “activities related to real estate”. Assuming that roughly two-thirds of these jobs were related to residential real estate, that’s roughly 96,000 careers.
A quick look at the numbers shows that close to 327,000 people were involved in “credit intermediation and related activities” leading up to the 2006 census. At the time, residential mortgage credit represented 34% of total household and business credit. This would imply that roughly 111,000 positions were directly influenced buy the housing market.
For more recent figures, CAAMP relied on the Survey of Employment, Payrolls and Hours. This report indicated that during the period between 2006 and 2011 residential construction growth increased by 13%. Real estate related positions also increased (9%) along with credit intermediation (11%).
Consumer Spending
Employment is just one of the ways the housing market impacts our national economic breakdown. The housing market also has the potential to affect consumers’ spending decisions and behaviours. For example, rising housing values tend to provide a positive signal about the state of the economy, which results in increased consumer confidence. This often leads homeowners to spend more, and/or borrow against their housing equity. According to information quoted in the CAAMP report, a 10% rise in housing values could help boost consumer spending by as much as 0.4% – or a factor of 4%.
Consider the following:
According to the 2006 Census, there were about 8.38 million owner-occupied dwellings in Canada. The average value of these homes was roughly $263,000. When aggregated out, that’s approximately $2.2 trillion. Since 2006, home prices have increased about 31% (or roughly 19% if you factor in inflation). As such, “real housing wealth” per person has increased about $50,000 since 2006. If you factor in that 4% impact explained above, that means that real consumer spending has increased about $2,000 per household, ultimately driving $17 billion into the Canadian economy.
Increased Investment
One final effect of a hot housing market is increased motivation to invest in real estate. When housing values are on their way up, there is incentive for investors to buy more. This can also impact owner-occupants who decide to purchase a home that is above their price range. This, in turn, can impact lenders who might become more willing to finance buyers with marginal qualifications.
How It All Falls Apart
While increased investment contributes to economic growth, it can also lead to financial disaster, as was the case in the U.S. At the peak of the U.S. housing boom, nearly 25% of home sales were attributed to investment motive. This created the U.S. housing bubble and subsequent burst. After the burst, investment ground to a halt and consumers became reluctant to buy. Lending criteria tightened and the economy seized up.
The question is now, how long before Canada hits a similar economic snag?
Currently, there appears to be a very mild investment motive in most parts of the country. CAAMP estimates that it accounts for roughly 2-3% of home sales nationally. This is a reasonable amount and is consistent with the current state of the economy. CAAMP’s research has also shown that mortgage borrowers and lenders have acted prudently, which has enabled the nation’s home equity rate to continue to grow.
A housing market downturn in Canada is thus more likely to occur following an increase in the nation’s unemployment rate. Increased jobless rates would impact the ability for homeowners to purchase real estate and contribute to the economy. A housing marketing downturn would further affect the economy through direct job losses in construction, real estate and lending. Losses of housing wealth would further impact the economy, creating a downward spiral similar to what the U.S. has experienced.
As such, the best way to support the housing market and to sustain its positive impacts on the nation’s economy is to continue to pursue policies that create jobs. One misstep could result in the collapse of the market and further economic strife.