In my last post, I discussed the relationship between poor profitability, economic stagnation, corporate cash hoards, and ballooning household debt. In this post, I will examine how these have driven a housing boom.
Mortgages make up the bulk of household credit, the largest and fastest growing part of bank loans. They exceeded $1.2 trillion in 2018.
Low corporate profit rates and loose monetary policy have driven interest rates to historic lows. This underlies the boom in homeowner credit. And anxious bankers have added fuel to the fire.
While regulators are tightening mortgage requirements to cool things down, private moneylenders are rushing into the market to finance borrowers who’ve been rejected by the banks. Subprime loans are making a comeback.
But mounting debt and shady dealings are only part of the problem.
The mortgage boom has inflated house prices to levels we’ve never seen before. House price inflation has been greatest in Ontario, where prices increased by 32% over the last decade — far above the inflation rate.
This has made housing ever more expensive, to be sure. But it has impacted the overall stability of Canadian capitalism, too.
Rising house prices have been a huge boon to construction. Figure 3 compares the construction profit rate to the industrial average.
The construction profit rate has been greater than the average over the last decade — sometimes by as much as 6%.
In response to booming profits, the sector has been flooded with investment. Its capital stock has grown by almost 40% over the last decade and it has added 310 thousand new jobs. All told, construction now employs almost 1.5 million people, making it the fifth largest employer in the country.
Construction firms have been feverishly turning out over 200 thousand new housing units per year. It has become the fourth largest private sector contributor to GDP, not far behind real estate, finance and insurance. It contributed 7% of all new income generated between 2007 and 2019.
But the leading sectors of Canadian capitalism are inextricably woven together. Banks lend to households, which drives demand for housing. Speculators help, too. This keeps real estate agents busy. Rising prices bolster construction profits, which encourage building companies to produce more homes.
This is debt-driven growth, and it cannot last. It will be a significant shock to Canadian capitalism when it comes to an end.
In my next post in this series, I will discuss in more detail just how precarious the situation has become.