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Gabriella Makar, B. Comm, MBA - RE/MAX Real Estate Centre
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Wednesday, June 6, 2012 - Housing: Investment or consumption?

While a wasteful public sector has driven Greece, and to a lesser extent Italy, to the edge of fiscal abyss - for the most part, Spain and Ireland’s problems had a different cause. The sovereign debt crisis in those two countries was mostly related to the over-investment in housing, necessitating a public intervention.

It’s important to make a quick distinction, as residential investment isn’t the same as other forms of investment in the economy, such as the investment in capital goods, factories or infrastructure. Investment in the latter, relate to generating wealth for future consumption (or economic growth). An investment in
more condo towers results in perhaps a better skyline, more striking views or a shorter commute time.

During the years leading up to the recessions in Spain and Ireland, the percentage of GDP that was going into
new housing developments was well over 10 per cent. By contrast, historically the rate the United States has been closer to is 5 per cent. There’s no rule as to how much is healthy to invest in the expansion of the housing supply, but having one in
every ten dollars spent in the economy related to new home building is certainly a warning sign.

Canadian ratios aren’t as bad as they were in Ireland or Spain. Currently about 7 per cent of Canada’s GDP is being driven by housing investment – the highest it’s been since the housing bubble of the late ‘80s – but it’s not outrageous given demographic and income trends. Still, Canadian regulators likely don’t want to see it go much higher.*

*Will Van’t Veld, Economist, ATB Financial

posted in General at Wed, 06 Jun 2012 11:07:55 -0600



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