All those construction cranes dotting the Toronto skyline might be evidence of an economy that has a serious problem, writes BMO Capital Markets’ chief economist Doug Porter.
The proportion of the economy related to construction is more than twice as high in Canada as it is in the U.S., Porter said in a client note this week. Of all the economic activity in Canada, 13.4 per cent is related to construction, compared to 5.8 per cent for the U.S.
“This is simply the most glaring [example] of how Canada’s unbalanced monetary policy — rates too low, currency too high — is affecting the economy. Note that in the 1990s, when the currency was too low and rates were too high, construction wallowed for a decade,” Porter wrote.
But what’s so bad about having a lot of construction jobs? For Porter and some other economists, the worry is that the present rate of building is unsustainable, and when the industry gets back to normal, there will be job losses.
“Any time you get to extremes on almost any measure of the economy, you have to start asking serious questions,” Porter told the Wall Street Journal. “Has something fundamental changed to justify this, or is it an accident waiting to happen?”
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Construction jobs now account for 7.6 per cent of all employment in Canada — the highest proportion in records going back to the 1970s, and well above the long-term average of around five per cent.
Most economists attribute this to the long period of ultra-low interest rates Canada has enjoyed since the Great Recession of 2008-2009. Low rates “juice” construction more than other sectors, Porter told the Journal.
Higher interest rates, then, could mean pain for the many people who’ve come to rely on construction, directly or indirectly, for their employment.
And higher rates do seem to be on their way. With bond yields rising since the spring, mortgage lenders have pushed up fixed-rate mortgages by about three-quarters of a percentage point, and more increases are expected.
The effect is already becoming visible, at least in Toronto’s frenzied condo sector. RealNet’s latest data, released Friday, show Toronto condo sales falling 18 per cent this August from a year earlier. And a year earlier was already a weak point for that market.
Developers are waking up to the possibility that the good times may be winding down. Three of Canada’s largest housing markets -- Calgary, Toronto and Vancouver -- have seen precipitous declines in residential land investment this year, a sign that future housing construction will be more subdued.
In the long term, that could be a good trend -- less construction will help prop up prices if the market turns south.
But for the increasingly large share of Canadians who rely on construction jobs, that should be a clear warning that the hiring frenzy may not last.