Industrial contribution to GDP growth

I recently came across this article here from "better dwelling" which is claiming that half of the 2019 Q3 GDP growth can be attributed to Real-Estate commissions.

To say the least I was surprised and very skeptical of this claim.

To evaluate I dug deeper into the article and then the data they used.

First of all the NAICS code [53] Real Estate Rental and Leasing (RERL) accounts for more than what is claimed by "better dwelling":

RERL is the contribution to GDP made during managing, selling, renting and/or buying real estate. To simplify it, it’s the commissions made from managing real estate transactions.

Although not nearly as significant it also includes other rental and leasing such as automotive, and consumer and commercial equipment, albeit this is a small component of RERL accounts. To simplify it is NOT just the commissions made from managing real estate transactions

Second. I am not entirely confident in how they determine that RERL accounts for just over 50% of the increase in annual GDP.

My Methodology in calculating:

1. Obtain GDP by industry from StatsCan. Canada this is 2018Q3 and 2019Q3, for all other provinces listed this 2017 and 2018 annual GDP. 
2. Calculate the growth rate of each industry.
3. Determine the weight of each industry in relation to total GDP.
4. Determine the weighted growth rate of each industry. 
5. Divide the weighted growth by the total growth to find the percent contribution to total growth.

The results of this methodology for Canada and each province is presented below. Note, for 2019Q3 I calculate Real Estate Renting and Leasing to only account for about 27% of the GDP growth. Mind you this is up substantially from 2018 where it accounted for only about 11% of the GDP growth.

The graphs below are presented without any further discussion. 

Feel free to comment with your thoughts or questions below.

The Impact of Changing House Prices on GDP in BC

Source: https://www.armstrongeconomics.com/markets-by-sector/real_estate/real-estate-in-decline/

Yesterday (11th of July 2018) the Bank of Canada continued to increase interest rates, as many expected. 

Since the increase in the interest rate, the media coverage has been flooded with conversation around the impact this will have on homeowners. Specifically, it is well presented that Canadian households currently have a pile of debt and will have trouble continuing to service their debt if their payments or obligations increased. you can read a Bank of Canada article on the subject here.

Building off of these discussions, although quite separate, I began to wonder. Here in BC the Finance, Insurance and Real Estate (FIRE) industry make up essentially 25% of our provincial GDP.

As governments continue to engage in policies which aim to make housing more affordable (decrease or slow price growth) and as the Bank of Canada continues its upward movement of interest rates (decreasing the demand and supply of real estate); we have some serious headwinds on house price growth. The question of interest then: Given the size of the FIRE industry in BC, for some change in the house price, how does this filter through to impact our provincial level of output?

To answer this I conducted a simple time-series analysis which allowed me to jointly model both house prices (Teranet national bank composite house price index for BC) as well as the provincial GDP (Statistics Canada).

In order to ensure stationarity, these variables have a log-difference transformation applied to them, giving them the interpretation of the annual percent change. Each can be viewed independently below:

With these variables, I then apply a one standard deviation shock to the transformed House Price Index (HPI), which works out to be about a 4.6% point annual change in the index. Observing how this shock filters itself through both the HPI and GDP over time we see the impact of this shock. This impact is presented below.

First, evaluating the impact of a 4.6 percentage point shock to the House Price Index (HPI) on itself. What we witness is no big surprise, the housing price index jumps in the shocked year (year 1) and then slowly returns to it's normal. With a 95% Confidence level, this shock to house prices has been fully absorbed within 2 and a half years.

Recall we are dealing with growth rates here. Imagine the HPI is doing its thing, then, out of the blue, it jumps by 4.6 percentage points. the effect is an immediate increase in the index, followed by 2 and a half years of additional (but slowing) growth before returning to its pre-shock level of growth. 

Looking at the impact of a shock to the HPI on GDP we witness an impact which was expected. Our shock happens in year one, however, this does not filter through to impact our level of GDP until the second year. At this point, the GDP jumps to an estimated increase of 2 percentage points (fairly large given average growth rates of GDP). However, this impact quickly subsides and is showing no statistical effect 2 and a half years after the shock.

Through this, we can determine the elasticity of GDP to the HPI (for some % change in HPI, what is the impact on the % change in GDP). Thus we can determine the elasticity of GDP to be 0.435, meaning that GDP is not overly sensitive to a change in the HPI, that is GDP would be inelastic. Just the same we can take this to mean that for a 1% point change in the HPI, we would expect to witness a 0.435% point change in the GDP.

So, if we do see a collapse of house prices, this may filter into a bad few years for the BC Economy. Keep in mind, in 2014 when oil prices collapsed causing Alberta's GDP to collapse, Oil and Gas (with support services) accounted for aproximately 8% of Alberta's GDP. Given BC's reliance on the FIRE industry (25% of GDP), a collapse in the price of real estate could very well have a major impact on our provincial economy.

What are your thoughts on this, feel free to comment below.

Speculation tax push back.

Source: http://www.oecd.org/social/affordable-housing-database.htm

Since the proposed speculation tax in the 2018 BC budget, the news has blown up with opinion pieces and articles in opposition to this tax. some examples can be found here and here, although there are many more.

Predominately it seems that the majority of the outrage comes down to a misunderstanding of the tax due to a poor choice of naming. That is, the outraged cry is usually along the lines of

"I am not a speculator, I just have a home in Saanich which I only live in a few months in the summer because I love the area" 

True, these individuals are not speculating, but the problem still remains, they own a piece of capital (housing stock) which they are choosing to allow to sit idle while so many individuals in the region are unable to find housing, let alone affordable housing.

Thus the trouble is in the name, this should not be labelled as a speculation tax but rather a vacant homes tax. In this way, we get around the problem that keeps arising from people feeling as if they are being labelled as a speculator while addressing the real problem of an idle capital stock.

The recent article listed above (first hyperlink) by the Times Colonist claims that the new tax will be a job killer as it will depress the housing market due to the fact that people will no longer be buying properties (to sit vacant for the majority of the year).

True, if this tax successfully decreases the housing market - this will hurt the BC economy in the short-run. Currently, the FIRE (Finance, Insurance, Real Estate) industry accounts for about 25% of BCs GDP  (23% in 2012, 24% in 2016), making it the largest contributor to BCs economy by far. That is, if this tax successfully pushes down housing prices, it will ripple through the entire FIRE industry, pushing down BC's GDP, pushing up unemployment (all else equal in the short-run).

Does this then mean its a bad thing? Well yes... but.

The alternative is we do nothing, we allow capital to continue to sit idle, allow housing prices to continue to inflate exponentially faster than wages until we arrive at such a discrepancy (currently being seen in Toronto, Vancouver, etc.) that professionals can no longer afford to live in these municipalities, which similarly hurts jobs as there is no labour to be had. (here, here).

Along these lines talking to several HR professionals in the CRD I am continually hearing the same story that the only applicants they receive are either (A) from established (older, near retirement) Victora applicants or (B) from Vancouver (higher priced market). Any time a qualified applicant is offered a job outside of these two areas the applicant resultingly turns down the offer due to lack of housing.

If labour refuses to move here for jobs then employers have two options. They can either (A) begin to offer higher salaries (which would help offset the cost of living) or (B), if possible, they will relocate to other areas which jointly offer lower wages as well as cheaper land, thus jointly decreasing two costs of production.

So yes, this tax does stand to hurt us today - the alternative is prolonged hardship and a flow of labour out of the region, similarily contracting the economy in the future.

What are your thoughts on the new speculation (vacant homes) tax? will the benefits of this tax outweigh the costs or will the distortionary effects of a tax create more harm than good? feel free to comment below.

Canadians most indebted in OECD

Stumbled across this CBC Article today, you can find the full article here

I have written and spoken on much of this before, but a brief summary is that Canadians currently are the most indebted of any OECD nation with 101% household debt to GDP. with the link being made that the majority of this debt is being held in real-estate or mortgage debt.

I know the Bank Of Canada has expressed concern about this the last few times they have raised rates to control inflation.

Reason being, here in Canada, majority of mortgage holders are on five year fixed rate mortgages. That is, every five years they need to re-negotiate their mortgage rate with their financial institution. So any borrower who locked in 4 years ago at record low rates, now that they are coming up for renewal, they may be in for a surprise as their mortgage payments drastically increase in order to keep their amortization schedule on track.

If inflation ever rebounds forcing the Bank of Canada to act on interest rate to fulfill their mandate ... many borrowers may find themselves in trouble.

Adding to the problem, the article also notes that house prices in Canada are 50% over-valued in relation to the corresponding rental price for that real-estate. Although there are several ways in which rental prices are tied to real-estate price, if you are interested about the relationship, I have written about one here.

What are your thoughts on the revelation, shocking, or as expected?

Feel free to comment below.

On the different measures of GDP

Another semester kicking off and once again time to demonstrate and explain different measures of GDP and why we have different measures.

For those interested (bit of a rabbit hole of links), here is a link to a short review of an article by Philip Cross at the CD Howe institute on the subject matter by Dr. Giles at Uvic, as well as a link to the complete article (which in its self is fairly short).

Interesting read and insight for sure!