Canadian housing mania is consuming more and more of the country’s capital. The country is now devoting a record share of gross fixed capital to build homes. It’s really hard to appreciate this number without looking at the rest of the world. The share of investment devoted to homebuilding makes the US bubble look like minor froth. Canada spends a bigger share of investment capital on housing than any country in the whole OECD… by a very large margin, too.
Gross Fixed Capital Formation
Today we’re going to look at Gross fixed capital formation (GFCF), and housing. GFCF is a macroeconomic investment indicator. The boring technical description is the acquisition of produced assets, minus those disposed. More casually, it’s capital devoted to increasing the capacity of an economy.
The OECD just calls it “investment” in many of their reports, and breaks it into five areas. Residential investment is one of those areas. If you’re not familiar, this is the construction of new homes, and major renovations. It excludes the cost of land, and is just the actual buildings. This indicator was one of the biggest warnings for the US housing bubble.
An increase to GFCF is always desired, but where it lands can be problematic. If more capital is devoted to a single segment, it comes at the opportunity of other areas. If you’re deciding between starting a business and buying a new home, the spend only lands in one area. This is particularly dangerous when it flows into residential investment and housing.
More people have exposure to housing than any other asset. As a result, governments prioritize investment in this area. They also tend to prevent it from leaving, building up a moral hazard and increased risk. This threatens to blow the whole economy up if the only jobs end up in real estate. It turns out it’s extremely difficult to just sell each other homes for long periods of time.
The US housing bubble before the Great Recession is often the warning story. During their bubble, spending on housing went from 20.5% of GFCF in 2000 to 28.7% by 2005. Close to a third of fixed capital went into building new homes. The rest of the economy lost 8 points of investment, as people concentrated on housing. Ultimately this led to a concentration of activity into one area, and the rest is history.
Canadian Housing Is Consuming 37% of Investment Capital
Canada is devoting an epic share of its GFCF to housing investment, to levels never seen. Residential investment consumed 37.2% of GFCF in 2020, up 11.4% from the previous year. In 2000, this number was just 22.4%, so it’s now consuming 66.1% more of the country’s fixed capital investment. A third of economic investment is just to warehouse people. To say it’s disproportional for the size of the economy is a big understatement.
Canadian Share of Investment Spent On HousingThe annual share of gross fixed capital formation spent on residential investment in Canada and the United States. Source: OECD; US Federal Reserve; Better Dwelling.
The Share of Investment Spent On Housing Is 40% Lower In The US
The US has also been heavily into housing investment during the pandemic. Residential investment consumed 22.1% of GFCF in 2020, up 22.8% from the previous year. This is much lower than the 2005 peak of 28.7%, and just a couple points higher than 2000-levels. In other words, the economy is seeing fairly balanced growth over the long term. Even with the huge boost in 2020, the share of investment going to housing is 40.6% smaller than in Canada. That gives some context as to how different Canada is from the US. How about the rest of the world?
Canada Spends The Biggest Share On Housing In The OECD
Data from other OECD countries emphasizes how big Canada’s property bubble has become. Canada has the highest share of GFCF devoted to housing in the 37 member group. The next country is Germany, and at 32.4% it’s nearly 5 points lower than the share in Canada.
OECD Share of Investment Spent On HousingThe annual share of gross fixed capital formation spent on residential investment in OECD member countries at the last reported data point. Source: OECD; US Federal Reserve; Better Dwelling.
Even outside of the OECD, it’s a struggle to find a country that devotes a larger share of capital. Indonesia is the only country with readily available data I could find, with 75.9% of their GFCF devoted to housing. Considering it’s a newly industrialized country, with annual GDP growth above 5% — it’s kind of a different story. Still heavily concentrated, but a totally different level of inequality that isn’t typically compared.
Canadians are devoting over a third of the country’s investment capital into housing. This isn’t just unusual for Canada, it’s unusual for any developed country in the world. It demonstrates a dangerous sentiment — investing in anything but housing is a poor use of capital. A large segment of people would rather spend money on housing, than on a business. Who can blame them?
Why would anyone invest any capital in starting a business, when they can devote more to housing? It’s perceived as low risk, the government says they’ll backstop it, and the gains are tax-free. It sounds like a great plan, until you start to wonder where the jobs come from if not local investment. Maybe everyone can just start selling each other homes.
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