Is Canada’s Hot Residential Market Hiding a Productivity Crisis?
He noted that until the early 1990s, non-residential investment was generally above 10% of GDP. It then averaged about 10% of GDP until mid-2010, when it fell. In contrast, residential investment accounted for about 5% of GDP until the 2000s, and has been generally increasing since then.
Following a 2014 decline in non-residential investment and an increase in residential investment after 2019, Chronic said Canadians begin to spend more on new homes, renovations and real-estate transactions, which help businesses equip their workforces. They spend more than they do so that they can compete internationally and, not coincidentally, earn higher wages and benefits.
While Canadians can take some solace in the fact that many investment goods are becoming more affordable—for example, modern computers offer significantly more bang for the buck than they did in the 1990s—this is true all over the world. The fact that business investment is stronger in other countries, particularly in the US, means Canada runs the risk of becoming less competitive by the year.
Because firms pay the majority of their capital expenditures with internal funds, Ambler and Chronicle noted, the total dollar amount of outstanding residential mortgages has always exceeded existing company loans. But in the early 1990s home mortgages amounted to only about 50% more than corporate loans; By the early 2000s, they were twice as large, and a decade earlier they were 3.5 times as large. Although they have decreased slightly since then, the home mortgage is still 2.5 times the full amount of the outstanding company loan.
“We have nothing against housing,” the two said, recognizing the role construction, renovation and transactions in the housing market played during the pandemic in supporting the economy. “But other investments matter, too. Without buildings, machinery, IP products and other equipment, we can’t earn the income to buy what we need, not to mention maintaining those roofs.