Canada’s economy posted lacklustre growth last quarter, thanks to its housing market

Photo: James Bombales

Canada’s GDP grew by 2.0 percent in the third quarter of the year, falling just below many economists forecasts. While there were several factors involved in the somewhat lacklustre growth figure, a cooling housing market certainly had a role to play.

Booming home sales in some of the country’s biggest housing markets kept the economy riding high in 2017. But, ever since a new mortgage stress test was introduced in January, both housing activity and GDP growth have been lagging.

“Both consumer and government spending were so-so (at 1.2 percent and 1.9 percent, respectively), while housing fell again (-5.9 percent),” writes Douglas Porter, chief economist at BMO, in his most recent note.

Earlier this week, CIBC economist Royce Mendes noted that the cooling housing market could also be blamed in part on rising interest rates. After years of historically low rates, the Bank of Canada hiked the overnight rate to 1.75 percent in October, and is expected to do so again in the new year.

“Growth popped higher in the second quarter, but momentum has slowed since then,” wrote Mendes. “Household spending appears to be feeling the pinch of higher interest rates. So is the housing market, which is also being dragged lower by tighter mortgage lending standards.”

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But not everyone is singing the same sad song. In fact, according to Derek Holt, VP and head of capital market economics at Scotiabank, the economy is actually performing better than you might expect, given various headwinds.

“All things considered and in light of tales of doom and gloom, this is still an economy that has managed to achieve growth of 2.0 percent in Q3, 2.9 percent in Q2 and 1.7 percent in Q1,” he writes. “That’s less than the super charged US growth…but it steers well clear of the concern that 2019 would be derailed by housing and consumer worries.”

Holt predicts that, as the housing market continues its gradual adjustment to stricter mortgage rules and higher interest rates, it will begin to stabilize in the final quarter of the year.