Slave to Housing

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Canadian Subordination

This chart is from the August 2013 IMF study "The Driving Force behind the Boom and Bust in Construction in Europe" Prepared by Yan Sun, Pritha Mitra, and Alejandro Simone.

The Canadian population, in both public and private sectors, has been extremely dependent on housing as a percentage of GDP, well over 15% in 2011 compared to the U.S. and Germany at less than 5%.

The current Canadian fiscal policy is to balance the budget by 2015–16 which means somehow getting more revenue, spending less or both. As the IMF report observes:

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As a control variable, government capital expenditure is significant, reflecting the large portion of government capital investment in infrastructure.

The March 2013 Budget does provide a large spending carrot of $53 billion over 10 years but that is not scheduled to start until 2015 which I presume is AFTER the budget is balanced. Meanwhile as we know CMHC has reversed its policy of "every one in the pool". 

Now the advice from governance is to get back to work, shed the excess debt and stop flipping real estate because as the IMF study notes: 

A rising construction share during the boom time means construction grows faster than GDP, and a sharp decline during the recession reverses the process. 

Canadian GDP (1.4% as of 1Q 2013) has been in a downtrend along with other developed countries for the last 50 years. So if the Canadian government is going to balance the budget in the next 2 years on declining GDP, then my guess is their plan for spending $53 billion is not going to start on schedule.

Here are some more quotes from the IMF study:

Most of the cyclical patterns in construction are similar to the business-cycle characteristics of investment in the macro-economic literature. For example, in a comprehensive study of 71 post-war US macro-economic time series, Stock and Watson (1999) found that investment in structure, especially residential structure is highly volatile and pro-cyclical. They also noted that employment in contract and construction is more than twice as volatile as the cyclical component of real GDP.

For advanced economies, the dependency ratio negatively affects the construction share. Dependency ratio affects construction through a few different and possibly competing channels. For example, a population with a high dependency ratio will have higher number of families. This will tend to increase demand for residential housing. On the other hand, high dependency ratio reduces household earning and thus housing affordability, depressing demand for housing. Our results suggest that overall, a higher dependency ratio may reduce housing affordability enough that demand for construction is reduced.

We're there folks: Canadian housing starts edge lower in July. Total Canadian urban housing starts fell 2.1% in July. Single-unit starts fell 5.5%. "Urban starts increased in British Columbia but fell in all other regions, including Atlantic Canada, the Prairies, Ontario and Quebec, CMHC said."