Expert claims housing fixation is squeezing out critical business investment
A real estate analyst is sounding the alarm over Canada's "housing obsession," arguing it is diverting investment away from productivity-enhancing areas and hampering the nation's economic potential.
Realosophy Realty president John Pasalis dissected how the country's infatuation with residential real estate may be exacerbating what the Bank of Canada has deemed a "national emergency" - Canada's sluggish productivity growth.
"While Canada had the sixth-highest labour productivity out of 32 OECD countries in 1970, it ranks 22nd today," Pasalis notes, citing a report by Alberta Central chief economist Charles St-Arnaud.
The report found that since 2000, investment in machinery, equipment and intellectual property has declined as a share of GDP, while residential investment in renovations and housing transfer costs has risen to nearly equal levels.
The flow of credit from financial institutions is driving this trend, according to Pasalis.
"Lenders are willing to lend to borrowers who offer the greatest risk-adjusted return on their capital," he wrote in a blog post. "Over the past 20 years, residential mortgages have proven to be a relatively low-risk investment for banks."
With mortgage debt presenting lower risks and higher returns than business lending, Pasalis suggests banks have been incentivized to fuel the housing market over productive business investment.
"While households were net savers in Canada from the 1960s to 2000, they have since become net borrowers, contributing to Canada's rapid increase in household debt relative to income and GDP," Pasalis stated.
He cautioned that addressing the productivity crisis will require "incentives to increase lending to corporations and incentives to encourage households to save more and borrow less."
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However, Pasalis acknowledged that "converting a nation that has become addicted to using its home equity as an ATM... can only be achieved by making it harder for homeowners to borrow against their home equity, which banks and policymakers are in no rush to do."
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