“The broker came and showed them that the market was complete,” he said, explaining that clients were counting on the sale of another property to finance the renovation work. “He refused, and the money they put in, they might not get back.”
Similar stories of existing projects being scaled back or canceled, and new business slowing slightly, are proliferating throughout Canada’s once thriving home renovation industry. The tales may be a harbinger of broader fears to come.
The Canadian housing market, including renovations, has risen to more than 8.5% of GDP during the pandemic, a level not seen since the late 1980s. But with the Bank of Canada aggressively raising interest rates to control inflation, home prices are already falling and the broader real estate industry may be swaying.
“This is when we started seeing lower housing starts, lower investment in new construction, lower job opportunities,” said Stephen Brown, an economist at Capital Economics. “We expect residential investment to fall by 24% over the next 12 months, and since residential investment currently accounts for about 10% of GDP, that will subtract roughly 2.5% of GDP. We still see room for GDP. The domestic market is almost flat, thanks to a sharp rebound in exports and business investment, but it will be a close call to see if there is a recession.
With inflation at the highest level since the early 1980s, the Bank of Canada quickly raised interest rates, bringing the benchmark rate to 2.5% from 0.25% since March.
The Bank of Canada Shock 100-Point Rise is the Most Since 1998
This has led to an almost immediate downturn in the housing market that only appears to be fast paced: In June, the benchmark home price in Canada posted its biggest one-month decline — 1.9% — in data going back to 2005, after a more moderate one. Drops in April and May. And as this slowdown continues, there are signs that it is trickling down to some businesses that rely on the housing market other than buying and selling real estate.
“People are scared,” said Roman Orloff, a home renovation contractor in Toronto, who said new business inquiries have fallen 40% in the past few months, and he’s heard the same thing from colleagues who do landscaping, painting and pool work. “There is a decline in the volume of inquiries.”
And much of that decline, in both the housing market and related industries, came before the Bank of Canada took its biggest step yet: the one-percentage point interest rate hike it implemented last week.
Toronto home sales fell 41% lower prices for the fourth month
A recent survey by BNN Bloomberg and Rate.ca found that 27% of homeowners have borrowed against the value of their homes through a home equity line of credit, and more than half of those still have an outstanding balance on it. Because interest rates on this type of debt usually follow moves in the central bank’s benchmark rate, these borrowers face higher costs, which means they’ll have less to spend on renewals and everything else.
Last week, Bank of Montreal economists lowered their forecast for Canadian economic growth for 2023 to 1% from 1.5%.
“If you look at the residential construction component, which is resale, renovation, new building, that component of GDP is really shrinking as we speak,” Robert Cavic, chief economist at BMO, said in an interview. “Maybe it’s the biggest factor.”
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