Canadian Construction Bubble

Hundreds of thousands of people in the Canadian construction industry are at risk of losing their jobs once the housing bubble pops. But how real is the risk?

In Toronto the upcoming construction bust is inevitable as new home sales hit record low in Q3 of 2013 and housing starts are crashing.

The Canadian Home Builders' Association says that the construction industry is essential to Canada's long term prosperity. Well, duh! By some estimates 30% of the economy directly or indirectly depends on real estate.

According to Statistics Canada there are over 1.3 million construction jobs in Canada. Of those, 845,000 (65%) jobs are estimated to be in new home construction and renovations.

My prediction is that once the construction bubble pops plumbers, painters and brick layers will start losing their jobs, and the Canadian housing bubble will burst too. Consequently Canada will enter a recession far more severe than 2008.

The below graphs shows a total number of construction jobs in Canada.

And here's the graph that shows what happened to the construction industry in the United States.

To put things in perspective the below graph shows the total workforce versus the construction workforce in Canada.

With all the this mania of real estate viewed as an investment, the construction jobs in Canada grew way, way faster than the overall job market in Canada. But hey, if getting a $2000 granite counter top for your kitchen is considered an investment, no wonder the construction sector in Canada is booming.

It should come as no surprise that renovations spending in Canada recently hit an all time high.

Finally, lets take a look at how large the Canadian construction industry is when compared to the rest of the world. The following chart is from the IMF.

According to the IMF report, the construction sector overshot in Europe before the 2008 financial crisis. Since then the construction sector has declined in many EU countries but there is still room for adjustment to occur. Notice construction shares in both Ireland and Spain (both countries had enormous housing bubbles).

Now, in Canada, construction accounts for 16% of the GDP.

Did Canada's construction sector overshoot? You bet it did. In fact it looks like it overshot by the most in the world.

One might expect China or Dubai (UAE) to have a larger construction share of the GDP. But that is not the case according to the IMF. See the chart below which shows construction shares in the emerging economies.

All in all, the Canadian economy relies on the construction sector more than any other country in the world. Once the current boom turns in to a bust, expect a very, very hard landing that Canada might not recover from for a very long time.

P.S. As I researched this topic I came to realize that the Canadian construction industry is "too big to fail". Once the shit hits the fan I think government will come up with all sorts of programs to stimulate the sector. What do you think?