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How is Canada’s Housing Market Tied to the Economy?

We all hear talk all the time about the effects Canada’s housing market has on the economy. Consumers can’t be pushed out of the market with overvalued properties, because this would be a huge drag on the economy. The federal government must be careful about the rules they impose on mortgages, because that will slow down consumption, and have an effect on the economy – as it takes a significant number of construction jobs out of the economy. When that happens, those lost incomes could turn into defaulted mortgages, piles of debt that the consumer can no longer afford, and our economy starts to tumble. And if imports and exports aren’t chugging along at a nice pace at the same time that happens, well that’s the perfect economic storm. That being said, here are some interesting stats on the housing market; as well as a look at how they each have an effect on the economy as a whole.

Home prices.

Of course, home prices in the housing market have a huge effect on the Canadian economy as a whole. A home is the biggest purchase a person is likely to make in their lifetime, and so the nation’s mortgages together represent a large majority of total consumer spending (about $330 billion, according to CMHC,) which in turn keeps the economy churning. Including the properties attached to those mortgages and the value of properties on homes that are owned outright though, according to CAAMP, the amount of owner-occupied housing in Canada equals $3.48 trillion.

Also according to the Crown organization, the average principle amount outstanding is $170,000 (per mortgage.) However, while the prices for those mortgages may currently still be climbing, they’re set to drop within the next couple of years. When that happens to the point that home prices have dropped 5% within a one-year time frame, CIBC says that it will cause the economy’s GDP to drop by half a point. The fact that our rising home prices have risen so sharply over the past five years has caused our GDP to climb by 1.2%, according to CAAMP.

Home Equity

Home equity has a huge impact on the Canadian economy, and if you don’t believe us, just look at what happened in the U.S. when a majority of homeowners found themselves without any, and without any income to fall back on, due to layoffs and job losses. According to CAAMP, 68% of Canadians currently have equity in their homes. That’s a considerable amount compared to the 43% of U.S. homeowners that can currently say the same. Just before the great recession hit in the States, that number was even less. When Americans lost their jobs they could no longer pay their mortgage, people defaulted, and the housing market took a huge hit. Home prices plummeted, making the average homeowner’s mortgage more than their home was worth.

That doesn’t mean that Canadians don’t like to tap into that home equity. The average amount on any given HELOC in Canada today is about $58,600, according to CAAMP. Much of those borrowed funds are applied to renovations, the biggest reason people tap into their equity. In 2010, renovation spending in Canada totaled $45 billion.

Housing Starts

Housing starts mean that there is construction happening, which means that the people working on those construction sites have a job to go to every day. That translates to a boost in employment, which adds to a boost in the economy.

According to Scotia Economics, new housing starts in Canada equal about 200,000 per year; and the construction sector alone employs about 890,000 people a year. Approximately half of those jobs have come in the last decade alone. And it’s not just construction sites that add to employment based on the housing industry – mortgage and banking positions are also created. Mortgage-based jobs currently make up about 400,000 jobs in Canada.

The fact that the housing market has a profound impact on the economy, and vice versa, shouldn’t really be news to anyone; but it’s important to have the actual figures. Especially now when all of those numbers are facing a probable downturn.

Later on we’ll have a look at another area that has a huge effect on the economy, and the housing market. That’s the area of importing and exporting. This is an area that dropped during the great recession, as most countries importing and exporting activities slowed to a sluggish pace. Now though, if Canada faces another recession, imports and exports may be all we have to keep us afloat.

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