Did you know housing PULLS an Economy out of a recession?

First, lets quickly recap what a recession is.

A recession is defined as declining GDP, and high unemployment.

A simplistic way of thinking about GDP is to think of it as a collection of all the small businesses like a grocery store, a furniture store, or a sub-contractor.

A declining GDP essentially means the majority of these businesses are earning less money today than they were last year.

If a business earns less today than it did last year, then it will find a way to either reduce their costs and/or increase their sales to increase their profitability. Often, the quickest way to reduce costs is to let go of an employee. This leads to rising unemployment rates.

So how does the housing market PULL an Economy out of a recession?

When an economy is in a recession, the only tool the Bank of Canada can use to help the economy get out of a recession is to lower the interest rate.

Lowering the interest rate, makes the cost of money more affordable.

The monthly interest costs on a multi-million dollar development project is unimaginable when interest rates are high. Often, these interest costs are enough to make new developments un-profitable. Causing many developers to pause these projects, which leads to rising unemployment rates.

But, when the Bank of Canada cuts interest rates these projects become more profitable and incentivizes developers to keep building.

Each one of these multi-million-dollar development projects has a ripple effect on the economy. Development projects provide jobs for the: lumber industry, cement industry, steel industry, engineers, sub-contractors, furniture stores, hardware stores, etc.

When the Bank of Canada lowers the interest rate: developers build more projects -> creating more jobs -> increasing the GDP -> and helps pull the economy out of a recession.