Canada’s housing obsession blamed for productivity slump

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Canada’s poor productivity is the result of a lack of investment in business and technology while investment in housing has soared, says a new report from the Fraser Institute.

The think tank’s report, which compares investment in Canada and the United States, found that over the past two decades capital investment in Canada was greater than in the U.S. “relative to the size of the economy.”

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However, the report’s author attributes this mostly to the “enormous investments made in housing in Canada versus the U.S.” From 2014 to 2021, housing accounted for 34.1 per cent of total investment in Canada, versus 18.5 per cent for our neighbour to the south.

Meanwhile, U.S. investment in areas considered to boost productivity dwarfed that of Canada’s during the same time period.

For example, total investment in IT was 10.4 per cent in Canada and 16.5 per cent in the U.S. Investment in research and development and other intellectual products represented 27.7 per cent of total investment compared with 12.6 per cent in Canada.

“Weak business investment in technologies like IT and research and development — which help Canadian workers be more productive — impedes improvements in Canadian living standards,” said Steven Globerman, senior fellow at the Fraser Institute and author of the report.

It might seem counterintuitive that the Fraser Institute is worried about housing investment, given that the country is in the midst of a full-blown housing shortage and affordability crisis.

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Globerman doesn’t say there is too much housing investment.

“Canada clearly does need more investment in residential housing, but policies need to be put in place to encourage more domestic savings to finance increased business investment as well, especially given newly implemented government policies that are aimed at promoting more investment in residential housing,” the author said in an email. “The worry raised by the study is that the increased demand for financial capital to finance new residential housing will crowd out business borrowing for investments in things like R&D, AI, software, data centres, etc.”

Productivity is important because when it is weak it can hinder the economy and eat into people’s standard of living, the Fraser Institute said.

Bank of Canada senior deputy governor Carolyn Rogers brought it to the nation’s attention when she declared productivity an “emergency” during a speech in March.

Rogers warned that weak productivity would make the economy susceptible to factors that could fuel future inflation.

During the speech, the bank official noted that, in 2022, Canada was producing 71 per cent of the value per hour generated by the United States economy. “While U.S. spending continues to increase, Canadian investment levels are lower than they were a decade ago,” Rogers told her audience.

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The data continue to support the productivity crisis narrative.

The most recent numbers showed Canadian businesses’ labour productivity fell by 0.3 per cent in the first quarter compared to the previous quarter, Statistics Canada said in June. The decline in productivity during the first quarter followed a 0.2 per cent increase in the fourth quarter of 2023 — the first after six consecutive quarterly declines.

From 2014 to 2022, output per hours worked increased at an average annual rate of 1.35 per cent in Canada, compared with 1.78 per cent in the U.S., the Fraser Institute said.

“If governments in Canada want to promote rising living standards through faster productivity growth, they must create a policy environment that’s attractive to productivity-enhancing business investments and not simply focus on building more housing,” said Globerman.

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U.S. inflation cooled broadly in June, driven by a long-awaited slowdown in housing costs and providing another dose of confidence for United States Federal Reserve officials that they can cut interest rates soon. — Bloomberg

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Today’s Posthaste was written by Gigi Suhanic, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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