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An independent Canadian government agency forecasts residential real estate investment will make up a smaller share of Canada’s real GDP in the coming years, dragging economic growth down with it.

The Parliamentary Budget Office (PBO) forecasts housing investment will sink to 6.5 per cent of the country’s GDP by 2020, down from the projected 7.7 per cent in 2016, the highest level going back as far as 1981 at least.

“The projected weakness in our outlook for residential investment largely reflects rising borrowing rates and a deceleration in house prices,” PBO states in its recent Household Formation and the Housing Stock report.

In October, the PBO projected (on an inflation-adjusted basis) that home prices would surge 9 per cent this year but that annual gains would grind down to just 0.3 per cent in 2019.

The agency suggests real estate investment will become a headwind for GDP growth by 2018.

It projects residential investment will lead to GDP growth equalling 0.3 percentage points this year, before falling to 0.1 percentage points in 2017.

In 2018, the PBO predicts the investment segment will nick GDP growth by 0.2 percentage points and in 2019 and 2020 dent it by 0.4 and 0.1 percentage points, respectively.

It will recover, though, making a 0.2-percentage-point growth contribution to the GDP by 2021, according to the PBO forecast.

The PBO notes its forecast didn’t take into account measures Ottawa announced in October. Then, Canadian Finance Minister Bill Morneau revealed the Canadian government would be introducing tougher stress testing during the mortgage application process, among other changes.

“Although we have not undertaken an in-depth analysis of these new measures, our current judgement is that while they may alter the timing of our projected adjustment in residential investment over the near term, they are unlikely to meaningfully alter our medium-term outlook,” the PBO says.

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