Help us because we’re big and successful, help us because we’re small and poor
I was scrolling through a recent Bank of Canada staff discussion paper the other day (“Fundamental Drivers of Existing Home Sales in Canada” by Taylor Webley of the Bank’s Canadian Economic Analysis Department) and ran across something interesting.
The study’s subject was itself interesting enough: Can we come up with better forecasts for home resales? The answer appears to be “yes,” especially if we aggregate up by province rather than try to model at the national scale. The drivers of resales turn out to be not so surprising: employment, housing affordability and, especially in British Columbia, migration flows. What caught my eye, though, was that the exercise was cast as part of predicting the path of GDP, something the Bank is interested in for fairly obvious reasons.
But house resales aren’t part of GDP, you might say, and you would be correct. GDP is a measure of newly produced goods and services. Sales of new houses are part of that because new houses are, well, new. But sales of existing houses aren’t GDP because existing houses aren’t new. They were part of GDP in the year they were built.
On the other hand, as anyone who has bought or sold a home knows, there are a number of services that seem unavoidably linked to the transaction and they are currently produced and so therefore do count as part of GDP. The historical average of such costs (from 1961 through 2012) is that they’re about 0.9 per cent of GDP (here I’m reading from a graph, Chart 1 of Webley’s paper). But in recent years they’ve been almost double, rising to about 1.8 per cent of GDP—though their very latest value is around 1.3 per cent of GDP. GDP these days is about $2.2 trillion so 1.3 to 1.8 per cent of that is $28.6 to $39.6 billion. Not gigantic as these things go but not peanuts, either. And their value does seem to jump around a lot, so maybe as part of its macroeconomic oversight the Bank does have reason to try to get a handle on where they’re going.
What are these services? Real estate commissions, clearly. They’re a peculiar kind of compensation, varying as they do with the value of what is sold rather than the value of the service actually rendered. But that’s a discussion for another time. Land transfer taxes are also part of it, though as they are a tax and a transfer it’s not obvious how much of a service is actually provided. Their outsized growth in recent years has indeed boosted overall resale costs. On the other hand, StatsCan shows them as running about $5 billion a year so they’re far from the whole story.
Eliminating them leaves more than a per cent of GDP accounted for by the cost of Canadians buying and selling houses from each other. That surprised me. We Canadians do many, many things in our economy. To have more than $1 in every $100 derive from real estate transactions seems like a lot, especially since most of us don’t buy or sell a home very often. As someone who has a house that eventually will be for sale, I do hope there are or soon will be apps to help us reduce these costs!
My second thought after thinking that 1.8 per cent of GDP was a lot of GDP was that I don’t want the realtors’ association to find that out. Just about every association, group, guild or company that petitions the government starts its presentation by saying it represents X thousands of Canadian workers who produce Y billions of dollars of economic output and—this next bit is usually implied—governments therefore need to listen to what they have to say and, after a seemly interval for consideration, give them what they’re asking for.
But if you’re big, important and successful, do you really need favours from government? If I were in government, I’d thank them for their service, congratulate them as warmly as possible on their size and success and move on to something else. Yes, if this activity suddenly collapsed, great damage would be done to GDP (even if the people performing inevitably would move on to something else). But there’s little credible prospect of a collapse. (I do understand this attitude on my part is why I never will be in government. It’s hard to get elected telling everyone “No.”)
Of course, the other customary preface to petitions for assistance is from industries and groups that are smaller and less successful than they feel they need to be and would have us believe the country needs them to be.
Either way, government is trapped. Either it’s “We’re so big and important you’ve got to help us.” Or it’s “We’re so small and underdeveloped you’ve got to help us.”
Wouldn’t it be nice if someday a government were to respond: “We value you all. And we have simple, fair rules and low taxes for you all. But now you’re all on your own!”