Is Canada’s real estate-driven economy dragging down growth?
“The problem with real estate is that it’s a non-producing asset,” says Martin Pelletier, the co-founder of TriVest Wealth. “There’s no continual compounding economic spinoff from that investment, so once it goes into real estate, that money’s gone.”
It’s been said that Canada is a real estate market attached to a country. Geoff’s article tells us that that’s not entirely wrong. I was struck by the following quote from Martin Pelletier:
“The problem with real estate is that it’s a non-producing asset. There’s no continual compounding economic spinoff from that investment, so once it goes into real estate, that money’s gone.”
We spend a lot of time lamenting Canada’s productivity record and its declining GDP per capita. One cannot help but think that these two issues are interconnected. We have misallocated capital and talent to housing and the consequences are stark: homes are unprofitable and the country is unproductive. How do we get out of this conundrum?
13th September 2023 at 8:29 am
Rudyard Griffiths
The key debate here is political parties of all stripes are committing themselves to policies that could see hundreds of billions of more dollars pour into the RE sector to “solve” the housing crisis. What will be the effects of this on our lagging productivity? How will doubling down on housing as the engine for a sputtering Canadian economy help solve for our now declining per capita GDP? Long term wealth and prosperity (along with generous social programs) rest on consistent productivity gains and rising per capita GDP. We have to be careful that in our rush to flood the RE sector with government funding and private capital we don’t compound the very factors economically that have already demonstrably undermined our prosperity. To the point, RE isn’t a particularly productive use of public and private stores of capital. As Martin Pelletier says: “There’s no continual compounding economic spinoff from that investment, so once it goes into real estate, that money’s gone.” We need to think long and hard on this. No easy answers or fixes.
13th September 2023 at 7:32 am
Al Raftis
Very good summary of the sad state of our xonomy. My frustration is that on a small number of canadians will get this info. our Press do a terrible job reporting on the economy without being totally boring. I wonder if CBC reporters understand basic economics.
13th September 2023 at 3:00 pm
Paul Haliburton
I believe that average Canadians have been fixated on owning real estate because they have been raised to avoid alternative forms of savings such as the stock market. To many Canadians the stock market is a deep dark hole. The answer has been to own a house or some form of real estate because Canadians have been brainwashed to think that they can always get their money back. They have been taught to think that real estate is a “safe bet”; you will get your money back and more. Over the long term this has had a detrimental effect of the growth of Canada’s economy. How can Canadian companies grow and prosper if Canadians won’t invest in Canadian businesses. It is now turning out that the “safe bet” is no longer attainable. We need to begin teaching our children about personal finances and the various alternatives for accumulating capital.
13th September 2023 at 1:27 pm
Rudyard Griffiths
100% agree. Financial literacy or the lack of is it part of this debate.
13th September 2023 at 2:07 pm
Sean Speer
Yes. Public policy distortions are a big part of the story. Not only ultra interest rates but also various incentives and preferences including (but not limited to) subsidized mortgage insurance) has led to financial institutions and individuals to prioritize housing over other assets.
There’s a tendency to blame the market – including investors – but as is typically the case, the government is a major culprit in the case of housing unaffordability and the disproportionate role of real estate in Canada’s economy.
13th September 2023 at 2:10 pm
Geoff Russ
People betting all their future success on housing is especially acute in BC where I currently live. The lack of financial literacy among high school graduates is also a major issue in this regard. Housing prices have gotten so high that younger people have written off ever owning a property in a location they desire, and this is well-documented across Canada. Rarely do I hear my peers talk about putting money away in a TFSA, most of theirs are empty or close to empty, and many more are completely unaware. The only ones in my age bracket who do advocate for TFSAs work in banking and thus become educated about all the options available to young people as a way to save money.
13th September 2023 at 1:37 pm
Luke Smith
“‘In parts of cities like Vancouver, their real estate market is not shaped much at all by the local market, or even domestic factors, it’s really an internationalized market shaped by the movements and interest and perceptions of investors,’ says Aitken.
In 2020, investors were estimated to own one in four properties in Vancouver, and one in five in Toronto, largely financed by mortgages from commercial banks and investment firms.”
This is genuinely shocking—and infuriating. I’d love to buy a home soon, but there’s no way that’s happening anytime soon, and this doesn’t help. How am I supposed to compete with that?
13th September 2023 at 10:07 am
Rudyard Griffiths
What is not always appreciated here is the small business corporations of professionals are often the “investor” buyers of condos and townhomes. These corporations have the profits from their active businesses taxed at very low “small business” rate. This puts them at a considerable advantage in terms of the resulting purchasing power of their after tax dollar vs. an individual buyer, who if they are qualifying for any home today, is likely in a higher personal income tax bracket and are using much more “expensive” after tax dollars to compete to purchase a home. In short it is not a level playing field in broad swathes of the RE market.
13th September 2023 at 10:56 am
Stuart Thomson
Thanks for joining us on the first day of discussion at Hub Forum. Today, we’re talking about a deeply-reported piece by Hub reporter Geoff Russ that asks if real estate’s dominance is dragging down the rest of our economy.
This part of Geoff’s piece stuck out to me and it might go a long way to explaining the current Canadian malaise:
“Most new jobs created in Canada during the last two years have been public sector jobs.
“We’ve gone all in on two areas, working for the government and real estate, and both of those are non-producing,” says Martin Pelletier, the co-founder of TriVest Wealth.”
13th September 2023 at 6:30 am
Rudyard Griffiths
Talking of numbers these two paragraphs were an eye opener for me.
“ Last July, Statistics Canada updated its report on Canadian GDP by sector. Real estate, rental, and leasing topped the list with roughly $267 billion dollars in output, followed by manufacturing with $193 billion. Oil, gas, and mining accounted for $160 billion, while finance and insurance was worth $151 billion. On the whole, Canadian GDP was worth roughly $2 trillion last July.”
Vs.
By comparison in July of 1999, real estate accounted for $139 billion, while manufacturing stood at $193 billion. Oil, gas, and mining was worth $106 million, while $72 billion was bound up in finance and insurance.
13th September 2023 at 7:20 am
Jo Wearing
The idea that real estate would keep climbing has also drawn individuals into buying condos or adding on a suite thinking that would help them cover their mortgage or other needs. They do not understand the difficulties that can arise as a landlord. We need well run rental buildings not one of individual landlords.
All this investing in condos also means one pathway for younger people to build equity by buying a condo is now gone as they are out bid
13th September 2023 at 8:36 am
Lynne Tuff
I believe we could have both, individual landlords and rental managed condos. I think what is needed are more transparent rental laws that help landlords when they encounter a difficult tenant. More individuals would build affordable suites — “basement” this would help students, single parents, seniors and newly weds. This worked out very well from the 40’s to 8o’s.Tiny homes in backyards are becoming popular in many other countries.
13th September 2023 at 10:40 am
Sean Speer
Another thing that strikes me about Geoff’s reporting is that given the economic importance of the real estate market at this point, it makes one wonder if we have the stomach for the type of correction that we may need to improve housing affordability and rebalance Canada’s economy in a more productive direction. I think there’s reason to have doubts.
Comments (14)
It’s been said that Canada is a real estate market attached to a country. Geoff’s article tells us that that’s not entirely wrong. I was struck by the following quote from Martin Pelletier:
“The problem with real estate is that it’s a non-producing asset. There’s no continual compounding economic spinoff from that investment, so once it goes into real estate, that money’s gone.”
We spend a lot of time lamenting Canada’s productivity record and its declining GDP per capita. One cannot help but think that these two issues are interconnected. We have misallocated capital and talent to housing and the consequences are stark: homes are unprofitable and the country is unproductive. How do we get out of this conundrum?
The key debate here is political parties of all stripes are committing themselves to policies that could see hundreds of billions of more dollars pour into the RE sector to “solve” the housing crisis. What will be the effects of this on our lagging productivity? How will doubling down on housing as the engine for a sputtering Canadian economy help solve for our now declining per capita GDP? Long term wealth and prosperity (along with generous social programs) rest on consistent productivity gains and rising per capita GDP. We have to be careful that in our rush to flood the RE sector with government funding and private capital we don’t compound the very factors economically that have already demonstrably undermined our prosperity. To the point, RE isn’t a particularly productive use of public and private stores of capital. As Martin Pelletier says: “There’s no continual compounding economic spinoff from that investment, so once it goes into real estate, that money’s gone.” We need to think long and hard on this. No easy answers or fixes.
Very good summary of the sad state of our xonomy. My frustration is that on a small number of canadians will get this info. our Press do a terrible job reporting on the economy without being totally boring. I wonder if CBC reporters understand basic economics.
I believe that average Canadians have been fixated on owning real estate because they have been raised to avoid alternative forms of savings such as the stock market. To many Canadians the stock market is a deep dark hole. The answer has been to own a house or some form of real estate because Canadians have been brainwashed to think that they can always get their money back. They have been taught to think that real estate is a “safe bet”; you will get your money back and more. Over the long term this has had a detrimental effect of the growth of Canada’s economy. How can Canadian companies grow and prosper if Canadians won’t invest in Canadian businesses. It is now turning out that the “safe bet” is no longer attainable. We need to begin teaching our children about personal finances and the various alternatives for accumulating capital.
100% agree. Financial literacy or the lack of is it part of this debate.
Yes. Public policy distortions are a big part of the story. Not only ultra interest rates but also various incentives and preferences including (but not limited to) subsidized mortgage insurance) has led to financial institutions and individuals to prioritize housing over other assets.
There’s a tendency to blame the market – including investors – but as is typically the case, the government is a major culprit in the case of housing unaffordability and the disproportionate role of real estate in Canada’s economy.
People betting all their future success on housing is especially acute in BC where I currently live. The lack of financial literacy among high school graduates is also a major issue in this regard. Housing prices have gotten so high that younger people have written off ever owning a property in a location they desire, and this is well-documented across Canada. Rarely do I hear my peers talk about putting money away in a TFSA, most of theirs are empty or close to empty, and many more are completely unaware. The only ones in my age bracket who do advocate for TFSAs work in banking and thus become educated about all the options available to young people as a way to save money.
“‘In parts of cities like Vancouver, their real estate market is not shaped much at all by the local market, or even domestic factors, it’s really an internationalized market shaped by the movements and interest and perceptions of investors,’ says Aitken.
In 2020, investors were estimated to own one in four properties in Vancouver, and one in five in Toronto, largely financed by mortgages from commercial banks and investment firms.”
This is genuinely shocking—and infuriating. I’d love to buy a home soon, but there’s no way that’s happening anytime soon, and this doesn’t help. How am I supposed to compete with that?
What is not always appreciated here is the small business corporations of professionals are often the “investor” buyers of condos and townhomes. These corporations have the profits from their active businesses taxed at very low “small business” rate. This puts them at a considerable advantage in terms of the resulting purchasing power of their after tax dollar vs. an individual buyer, who if they are qualifying for any home today, is likely in a higher personal income tax bracket and are using much more “expensive” after tax dollars to compete to purchase a home. In short it is not a level playing field in broad swathes of the RE market.
Thanks for joining us on the first day of discussion at Hub Forum. Today, we’re talking about a deeply-reported piece by Hub reporter Geoff Russ that asks if real estate’s dominance is dragging down the rest of our economy.
This part of Geoff’s piece stuck out to me and it might go a long way to explaining the current Canadian malaise:
“Most new jobs created in Canada during the last two years have been public sector jobs.
“We’ve gone all in on two areas, working for the government and real estate, and both of those are non-producing,” says Martin Pelletier, the co-founder of TriVest Wealth.”
Talking of numbers these two paragraphs were an eye opener for me.
“ Last July, Statistics Canada updated its report on Canadian GDP by sector. Real estate, rental, and leasing topped the list with roughly $267 billion dollars in output, followed by manufacturing with $193 billion. Oil, gas, and mining accounted for $160 billion, while finance and insurance was worth $151 billion. On the whole, Canadian GDP was worth roughly $2 trillion last July.”
Vs.
By comparison in July of 1999, real estate accounted for $139 billion, while manufacturing stood at $193 billion. Oil, gas, and mining was worth $106 million, while $72 billion was bound up in finance and insurance.
The idea that real estate would keep climbing has also drawn individuals into buying condos or adding on a suite thinking that would help them cover their mortgage or other needs. They do not understand the difficulties that can arise as a landlord. We need well run rental buildings not one of individual landlords.
All this investing in condos also means one pathway for younger people to build equity by buying a condo is now gone as they are out bid
I believe we could have both, individual landlords and rental managed condos. I think what is needed are more transparent rental laws that help landlords when they encounter a difficult tenant. More individuals would build affordable suites — “basement” this would help students, single parents, seniors and newly weds. This worked out very well from the 40’s to 8o’s.Tiny homes in backyards are becoming popular in many other countries.
Another thing that strikes me about Geoff’s reporting is that given the economic importance of the real estate market at this point, it makes one wonder if we have the stomach for the type of correction that we may need to improve housing affordability and rebalance Canada’s economy in a more productive direction. I think there’s reason to have doubts.