Canada’s attempt to use helicopter money to stimulate building may have the opposite impact. Statistics Canada (Stat Can) building construction rose in December, which sounds like cause for celebration. However, when examined in real terms, it was the worst December in at least five years. Rising interest rates might be the first suspect that comes to mind, but in reality the data shows this problem was brewing nearly a year before interest rates showed any sign of moving higher.
Canadian Building Construction Investment Climbed In December
Investment in Canadian building construction climbed in nominal terms. Seasonally adjusted, investment climbed 0.3% higher to $19.83 billion in December. Residential construction was the lion’s share as usual, representing $13.8 billion (+0.3%) of the total. That’s a significant boost in nominal terms, and is just a couple billion below the August 2022 peak. Inflation adjusted is a lot less impressive.
Increased Building Investment Is Flat After Inflation Adjustments
Canadian building construction investment is virtually flat in real terms. The agency estimates seasonally adjusted real growth had a 0% change from a month before, remaining at $12.2 billion in 2017 dollars. That makes this the slowest December in a long time—at least five years, but likely much longer.
Real Investment In Canadian Building Construction Fell Before Rate Hikes
Canadian investment in building construction in nominal and real (inflation-adjusted) terms.
Source: Statistics Canada.
Canada’s Building Boom Was Killed By Inflation Before Rate Hikes
It’s easy to attribute this issue to rising interest rates throttling profit and leverage, but it’s a little more complicated. Investment in real terms peaked in July 2021, and had already dropped 11.5% by the time of the first interest rate hike. The most recent data shows a decline of 21.2% since peaking, nearly a year before investment peaked in nominal terms.
In short, inflation delivered most of the damage to building investment before interest rates. Policymakers attempting to stimulate construction are ironically driving non-market demand beyond supply chain capabilities. That can result in more nominal investment capital but less actual supply hitting the market, and at higher prices.
