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mortgage overload

A real estate for sale sign is pictured in front of a home in Vancouver, British Columbia, Canada, September 22, 2016. REUTERS/Ben Nelms

Soaring house prices have made Canadians wealthy on paper, but what are households giving up in order to make their mortgage payments? As part of our package on the financial squeeze being felt by Canadian homeowners, we profiled six families across the country to see how they are coping.

You don't have to tell Neil Chrystal about how a booming housing sector can put strains on an economy. He lives it every day, as the Vancouver developer scrambles to keep up with demand and compete for scarce contractors.

"New construction here has been very busy," said Mr. Chrystal, chief executive officer of Polygon Homes Ltd., which builds condos and townhouses throughout British Columbia's Lower Mainland – the epicentre of Canada's housing boom. "On any given day, there are about 1,000 workers at our sites. Those are trades who come to do drywall, painting, concrete work or landscaping. It is getting more challenging to find trades."

An influx of skilled tradespeople from Alberta, migrating to the Lower Mainland to escape the oil slump gripping that province, is helping ease some of his pressures to keep up with his building schedule. But more people moving in from Alberta also means more people looking for homes – adding even more housing demand.

"The local construction industry provides a lot of jobs in our marketplace. It's a huge economic driver," Mr. Chrystal said.

Indeed, the ongoing strength of the housing market in post-recession Canada – now seven years and running – has made the sector a critical engine of growth throughout the economy's often-trying recovery, not just in hot markets such as Vancouver but throughout the broader Canadian economy. The country's dependence on the sector for growth has become even more acute in the past two years, as the collapse in resource prices kicked away one of the strongest legs that the post-recession economy had been standing on.

Now, policy makers are looking to tap the brakes on the housing booms in massive markets such as Vancouver and Toronto, in response to deep concerns about dangerously high mortgage debt loads and fast-evaporating affordability. But experts warn they will have to tread carefully to avoid upending Canadians' broader economic prospects in the process.

"Yes, affordability is important. But we can't lose sight of the fact that this market has a huge impact on our general economic and personal well-being," said Frank Magliocco, partner and national real estate leader at business consultant PricewaterhouseCoopers Canada. "If we shut that market down, I think it could have a precipitous effect."

While it's hard to get a full measure of the real estate market's footprint on the economy, as a wide range of goods and services businesses have ties to housing-related activities, the most commonly-used gauge is to look at the two economic segments that relate directly to housing: residential construction (the building of homes) and real-estate services (the buying, selling, renting, leasing, appraising and managing of properties). These two segments today account for 15 per cent of Canada's gross domestic product, up from 13 per cent a decade ago. But more significantly, they have been responsible for an oversized 26 per cent of Canada's real GDP growth over the past five years – and a whopping 41 per cent of growth in the past two years.

This impact is most acute in British Columbia, whose economy is dominated by Vancouver – whose economy is, in turn, dominated by residential real estate. In 2015, residential construction and real estate services accounted for 21 per cent of the province's GDP, far above the national average. Since 2011, these two segments have produced 35 per cent of B.C.'s real GDP growth.

"You see the spinoffs in other industries as well," said David Bell, a business team leader at Vancouver-based PGL Environmental Consultants, which garners roughly half its revenue from real-estate-related work. "Developers hire consultants, mechanical and electrical engineers, all kinds of technical trades and the whole construction side. The side benefits even spill into the food and hospitality side, because workers have to buy their lunches and some people who travel use hotels."

The big gains in home prices over the past several years have also made Canadian homeowners much wealthier. Household net worth has surged 40 per cent in the past five years, thanks primarily to the rising values of homeowners' properties. This has delivered another economic lift, what economists call the "wealth effect" – in short, rising wealth fuels rising consumer spending. Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, estimates that about 10 to 15 per cent of the growth in Canada's retail sales in the past year can be attributed to the wealth effect from rising house values.

Of course, the bulk of Canada's housing boom is now centred in the Vancouver and Toronto regions; in most of the rest of the country, the sector has already moderated. But these two metropolitan areas – which, between them, represent about one-quarter of Canada's population and its gross domestic product – have delivered most of the growth in Canada's struggling economy of the past two years, propelled in no small part by their hot housing sectors.

The Conference Board of Canada recently estimated that metropolitan Vancouver's real GDP expanded by 4 per cent this year while metro Toronto's grew 3.4 per cent; by comparison, the Conference Board expects Canada's economy as a whole to achieve growth of just 1.3 per cent this year. If you deduct Vancouver and Toronto from the national figures, the rest of the country is on track to grow a paltry 0.5 per cent. In 2015, when Canada's economy scratched out 1.1-per-cent real growth, Toronto and Vancouver accounted for all but 0.2 percentage points of that.

Now, with Vancouver's housing sector recently showing signs of easing, the national economy soon faces a smaller growth contribution from that city. The Conference Board predicts that Vancouver's growth will moderate to 2.8 per cent in 2017, mainly on the back of a forecast 20-per-cent drop in housing starts, as new federal and provincial regulations take more wind out of the housing sector's sails.

Governments are also on the hook should the housing market fizzle. In a recent report, National Bank of Canada economists Warren Lovely and Marc Pinsonneault estimated that housing-related activity generates about $120-billion a year in federal, provincial and municipal taxes, covering about 17 per cent of their total revenues. Governments trying to cool their housing markets could put a hole in their own budgets.

"With so much economic activity and government revenue being spun off from today's housing market, policy makers (be it the Bank of Canada, financial regulators and/or federal, provincial, municipal governments) need to proceed cautiously and with a full understanding of what's at stake," Mr. Lovely and Mr. Pinsonneault wrote. "It's not so obvious that meaningful alternative revenue streams are waiting in the wings should today's housing-related revenue gusher dry up."

Jeremy Kronick, senior policy analyst at the C.D. Howe Institute, an economic think tank, argues that if governments want to cool overheated housing markets without chilling economic growth in the process, they've been going about it the wrong way.

"If you think about the measures that have been put in place to slow down the housing market, they're all on the demand side – they're all with the idea of slowing down demand," he said. "When you do that, maybe you get the result you want, but those actually slow down [housing activity]," he said.

"The supply side might be the better way to go. If you increase the supply of detached and semi-detached homes, you can get the lowering of price that help with affordability and risk-taking. But you get the added bonus of continuing to contribute to a section of GDP that is a big part of growth.

"Maybe it's time for a different approach that maybe produces more optimal results."

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