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Softened residential sector is affecting GDP growth

Softened residential sector is affecting GDP growth

Softened residential sector is affecting GDP growth
 

The impact of flattening prices and a 15 per cent drop in home sales — weakness exacerbated by the introduction of tougher mortgage rules this summer — means the Canadian economy can no longer count on the residential sector for growth during the end of 2012 and into 2013.

Photograph by: SCOTT OLSON, GETTY IMAGES , The Canadian Press

Residential real estate, which was a key driver of growth at the beginning of the year, is turning out to be a real drag.

Slowing sales in the once sizzling residential sector — which includes renovations, resales and new home construction — compounded August losses in other areas as real output in Canada dropped an unexpected 0.1 per cent in the month.

The impact of flattening prices and a 15 per cent drop in home sales — weakness exacerbated by the introduction of tougher mortgage rules this summer — means the Canadian economy can no longer count on the residential sector for growth during the end of 2012 and into 2013.

“I think the big story here is that housing will be a drag on growth,” said Douglas Porter, deputy chief economist at BMO Financial Group.

“It’s one of the few sectors that we’ve got where we’re actually looking for an outright decline in 2013. And that’s a big turnaround. Over the last few years, the housing sector has added to Canadian growth and in some cases has added fairly heavily. So to have it weighing on growth puts a lot more of the onus on other sectors.”

It’s a far cry from the first three months of 2012, where strong residential sales, bolstered by an unusually mild winter, contributed a point to the 1.8 per cent annualized growth for the quarter, Porter said.

For the third quarter, Porter said he’s expecting GDP growth of one per cent annualized, after taking into account a 0.3 drop in the residential sector. National Bank revised its third-quarter GDP growth to 0.8 per cent annualized, after taking into account a 0.1 drop in residential, economist Mathieu Arsenault said.

Arsenault’s outlook isn’t great either for the last three months of the year, where he’s calling for 1.5 per cent GDP growth annualized, including a 0.3 drop in the residential sector.

Prices are expected to remain relatively flat, or soften in some markets, with most analysts calling for a slight correction in the condo sector.

In a report warning the federal government to be cautious about “pouring more cold water on the housing sector,” CIBC economist Avery Shenfeld noted Wednesday that even “a five per cent per year drop in house prices, for example, would shed roughly a half-point off GDP growth through its wealth effect on consumer spending.”

An expected drop in new home construction, mostly in the building of condos in large cities like Montreal, Toronto and Vancouver, to levels aligned with household formation “would be even more consequential” in its impact on GDP growth, Shenfeld wrote.

“In 2013 an economic acceleration looks unlikely, absent a new source of growth to fill in housing’s gap.”

alampert@montrealgazette.com

Twitter: @RealDealMtl