Here’s how Canada’s housing market could impact its economic growth heading into 2019

Canada’s latest GDP numbers will be released later this week and, to no one’s surprise, the country’s housing market will likely have an impact on the results.

While a trend of slowly rising home sales could add to growth, a relatively cool home building sector could put a damper on things, according to the latest report from TD Economics.

“Residential construction will exert a drag on growth following a deceleration in housing starts…[providing] another headwind to GDP,” writes the TD team.

TD is predicting GDP growth of 0 percent for August, following a 1.3 percent increase in the first quarter of 2018.

Earlier this year, Capital Economics chief North American economist Paul Ashworth predicted that the housing market’s lacklustre contribution to the economy would continue well into 2019.

“We expect economic growth to slow to 1.7 percent this year and only 1.3 percent in 2019, as the housing downturn continues to weigh on consumption and residential investment,” he wrote.

While slowing home sales could weigh on the economy, Ashworth also predicts that house prices will erode in the coming year.

“For the time being, house prices have merely stagnated rather than collapsing, but that is probably only a matter of time,” he wrote. “Even without a decline in house prices, which would weigh on consumption via the negative wealth effect, we anticipate a sizeable contraction in residential investment over the next few years.”

Of course, the most recent change that could affect both the housing market and the economy is the Bank of Canada’s decision to hike the overnight rate to 1.75 percent last week. Higher interest rates lead to higher mortgage rates, which could discourage some would-be homeowners from entering the market in 2019.

TD notes that it seems likely that the Bank will continue to hike rates at a faster rate heading into the new year.

“In its relatively hawkish statement, most notable was the removal of its reference to ‘gradual’ in its tightening approach, with the emphasis now on its path forward to a neutral rate, seen as sitting in the 2.50 percent to 3.50 percent range,” writes the TD team.

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