Falling home sales in Toronto and Vancouver this year are reverberating throughout the economies in both regions, pulling down broader economic growth in Canada.
Residential real estate activity – including resales of existing homes, construction of new homes and home renovation – accounts for about 7 per cent of national gross domestic product on a direct basis, and a significant drop in resale activity this year is cutting GDP growth forecasts, economists say. The spinoff effects of a real estate slowdown, such as reduced spending on furniture and appliances, will amplify the impact.
The number of resale homes sold in Canada fell 14 per cent in the first half of 2018 over 2017, with sales dropping 25.5 per cent in Greater Vancouver and 27 per cent in the Greater Toronto Area over the six-month period.
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Sales activity in the GTA began to pick up in June and July, but not by enough to offset the significant drop in earlier months of the year. In Greater Vancouver, meanwhile, July sales came in 30 per cent below last year, a sign the market is still in decline.
Royal Bank of Canada senior economist Robert Hogue said the drop in resales of existing homes does not have nearly as large an impact on GDP as a decline in construction of new homes would have, but is still significant enough to reduce the rate of GDP growth both nationally and in Ontario this year.
“That slowdown is having an effect,” he said. “It may not have the effect we might think intuitively, like it is going to take GDP [growth] down to negative. But not contributing to growth I would say is a pretty significant development.”
He forecasts Canada’s rate of economic growth will slow to 1.9 per cent in 2018 from 3 per cent last year, and says reduced real estate activity is a factor in the drop. He predicts Ontario’s GDP growth will fall to 2 per cent this year from 2.7 per cent last year.
The largest direct impact to GDP from falling resale activity is the decline in commission fees paid to real estate agents. Agents traditionally share commissions worth about 5 per cent of the sales price, although some negotiate lower rates.
On a national basis, the dollar volume of resale home sales fell by $30-billion or 20 per cent in the first six months of 2018 compared to the first half of 2017, which suggests that commissions for agents fell by about $1.5-billion.
The Greater Toronto Area accounted for $16.2-billion of the national sales drop, reducing commissions in the GTA by about $800-million. Sales in Greater Vancouver were down by $4.8-billion, shaving approximately $240-million from realtor commissions.
Bank of Montreal senior economist Robert Kavcic said the decline in commissions cut one-10th of a percentage point off of GDP in the first five months of 2018, according to Statistics Canada data.
“It’s a pretty small share [of GDP] but it has fallen a lot,” he said. “And that’s national GDP – Ontario would probably be about twice that.”
Chris Slightham, president of Toronto-based Royal LePage Signature Realty, said reduced commissions will cause broader impacts as agents spend less on business marketing and promotion, while also reducing personal spending as their incomes drop.
“The 20-plus-per-cent decline by unit volume in the GTA – just in the trading volume – means one-fifth of last year’s business doesn’t exist this year,” he said.
The drop came on top of a decline in sales in 2017, he said, which means agents have faced more than a year of declining incomes.
Home buyers typically also incur legal and moving fees and spend more on renovations and household items, which means there is a secondary economic impact as sales fall.
“We’ve seen retail spending in areas like home-improvement stores and those types of places come down noticeably in the past six months or so,” Mr. Kavcic said.
The bigger economic impact will come if there is a decline in construction of new homes. New construction accounts for a larger portion of GDP because the entire value of new homes adds to GDP growth, not just the transaction fees and commissions.
Cynthia Holmes, a business professor who teaches real-estate courses at Ryerson University, said new homes are often sold two or more years before builders break ground, so a slowdown in sales takes time to reflect in housing starts.
“When there is decline in resale houses, usually that is associated with a decline in [sales of] new houses as well," she said. "That’s where our GDP gets hit pretty hard with all these new units not coming to market.”
A leading indicator of future construction activity is the level of activity at sales centres where developers presell new house and condo projects that are not built yet.
According to data published by BILD – an industry association for the building sector in the GTA – a total of 11,942 new homes were sold by developers in the first half of 2018, a drop of almost 60 per cent from 28,942 sales in the first half of 2017. That decline came on the heels of a 36-per-cent drop in sales in the second half of 2017 as the GTA housing market was cooling.
The decline was initially spurred by the Ontario government’s announcement of housing reforms in April, 2017, but rising interest rates and the introduction of tougher mortgage qualification rules on Jan. 1 have had an even larger impact on real estate activity.
Despite the income hit for realtors, Mr. Slightham from Royal LePage argues the current market slowdown is good news if the policy changes prevent a bigger market correction.
“It’s short-term pain for longer-term stability in the market. I don’t think that’s a bad thing for any of us.”