Analyst: Economy's dependence on housing activity poses grave risks

Residential activity accounts for a surprisingly large share of Canadian economic output at present

Analyst: Economy's dependence on housing activity poses grave risks

Despite being a vital component of Canada’s current economic recovery, a disproportionate reliance on housing activity is introducing major systemic weaknesses, according to David Wolf of Fidelity Investments.

Wolf noted that, at present, the residential property segment accounts for nearly 9% of Canadian economic output – a surprisingly large share, and the highest on record so far.

“Housing is becoming a dominant player in GDP in a way that is dangerous,” Wolf told BNN Bloomberg in an interview.

Wolf warned that Canada is exhibiting symptoms similar to those observed in Greece, Ireland, and Spain just before the Great Financial Crisis.

“These turned out to be epic housing bubbles that led to severe recessions,” Wolf said.

Read more: How likely is a Canada housing crash?

This is a trend that merits a careful look, as Canadian housing activity is not likely to taper off any time soon. For instance, a recent forecast by Mortgage Professionals Canada projected that the momentum built up during the first few months of the COVID-19 pandemic is likely to last well beyond 2021.

Approximately 6.08 million of the currently 10.01 million owner-occupied dwellings nationwide have mortgages. Among homes purchased in 2020 alone, 77% had fixed-rate mortgages, while 18% had variable rates and 5% were a combination of the two types.

Read more: Could rates rise sooner than first thought?

Wolf further cautioned that any attempt to moderate this overheating through rate adjustments might do more harm than good.

“If you try to cool the housing market using interest rates, you’re going to hit a lot of other things and hurt an already heavily-indebted economy,” Wolf said.