Following a decade of economic growth, forecasts predict that Canada is about to enter a phase of recession. The weak oil prices combined with household debt and a decline in residential real estate investment have prompted analysts to anticipate a slowdown in the years to come.
Real Estate Accounts for a Large Part of the Economy
The booming housing market of the past few years made this industry an important factor for the Canadian economy. With the housing market experiencing a slowdown, all the signs are pointing towards a time of downturn for Canada.
BMO senior economist Robert Kavcic states for HuffPost Canada:
“Historically, declines of this magnitude in such an important sector have usually correlated with a broader recession.”
As residential investment currently accounts for 7.5% of the economy, just off a record high, Canada now depends more than ever on the housing market. Any slowdown in this sector will have a much bigger impact on the overall economic situation.
Real Estate Slowdown Signals Uncertain Times
The new mortgage rules and increased interest rates, along with household debt, have left Canadians wary of spending their money. This decrease led investors to further play a defensive game.
The Bank of Canada took a vigilant stance as well, announcing they will not increase interest rates past 1.75% as previously expected. Not much can be said about when the bank intends to resume its initial plans as there is “uncertainty regarding the timing of future rate increases,” the bank declared.
Statistics by The Canadian Real Estate Association (CREA) indicate that this January saw the weakest results in home sales for the past 4 years, with a 4% drop compared to last year. In Toronto real estate, which used to be a booming market, the number of homes sold in the previous year was close to the figure from the last recession in 2009. Vancouver real estate also experienced flat sales and a decrease in prices comparable to the last downturn.
There’s Light at the End of the Tunnel
Although the housing market and the economy, in general, may enter a time of stagnation, there’s a bright side to the story as well.
Business investment is expected to rise as the government has lowered taxes on new capital which has made new investments less expensive. This forecast is also predicted in the central bank’s Business Outlook Survey which shows strong investment intentions for this year.
Another factor to consider is that Canada is at the end of an economic cycle that usually lasts 8 to 10 years. Analysts believe that the stabilization period shouldn’t necessarily lead to a recession, but after a significant expansion, as has been seen in the housing market, it is only natural that there must be a slowdown.
Craig Alexander, Chief Economist for Deloitte Canada, encourages businesses in an article for Deloitte Insights to stay calm and focused despite riskier times. Key investments and building for the future are important in preparing for the next business cycle.