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 Housing
The 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 Housing
The 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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I hear building more fixes this. lol
Going to explain this joke before someone concludes that building more actually fixes this. This isn’t an issue with a shortage of land, because it’s the amount spend on just the building.
If you have more money to dedicate to building housing but there’s only so much housing, they can’t do anything but spend more on building the same units (allowing cost to absorb more capital). It’s the same as inflation due to demand.
The only way to manage this is to build more AND have tighter monetary policy.
A lot of data shows there may be no issue at all with lack of supply of housing. Even during periods of massive oversupply of newly built homes prices were accelerating. The only way to fix the issue is yes, continue to build, but the key is eliminating the investment mindset from homebuyers. It’s primarily people investing in housing that is making it unaffordable, not a lack of supply.
You can potentially de-commodify housing a number of ways: change taxation, restrict empty and 2nd property, restrict foreign ownership, etc. Anything that makes it less attractive to invest in housing will help to moderate prices towards its’ intrinsic utilitarian value.
Imagine in 2005, looking at any American and saying — one day Canada is going to devote more than twice of their economy to housing.
Imagine a politician seeing home prices rise 40%, and then saying it can’t fall, because those people have no monies.
I’m ashamed at how smug I was in 2008 when the US housing market collapse.
“Haha, stupid Americans don’t even know the difference between interest and principal. This could never happen to prudent Canadians.”
How utterly wrong and stupid I was. Mea culpa, my American friends.
We have no world leading industry, heavy national burden due to healthcare. Our taxes are very high, so people with high earnings leave. Whats left? Housing of course. Luckily we are still desirable compare to other countries or else we would not have housing either.
Canada has some of the world’s most talented people… we sell them to the US and big industry at a massive discount. That’s the value proposition.
We even give tax breaks to those companies paid with our tax dollars, essentially buying our jobs at a lower rate.
Health care in this country is not a burden. People with your attitude are.
*popcorn gif*
Canada can keep doing this forever. It doesn’t matter, as long as the rest of the economy grows too.
haha. No my friend. Just over one in two people in the country need to work in real estate to make this situation true.
No man. It really can’t. Ireland tried. It works really great until it doesn’t, and then it collapses under it’s own weight.
Yeah and it takes time to inflate one of the biggest asset bubbles in human history. Two decades sounds about right. The government really painted us into a corner on this one.
Canada long ago became and still is Real Estate Boiler Room Bubble of epic proportions.
https://en.wikipedia.org/wiki/Boiler_room_(business).
This reality (nightmare) was conceived, funded, nurtured and vigorously defended by successive Federal (much worse since Trudeau) and Provincial governments and real estate industry in the period spanning longer than several decades. The simple truth is as a country we do not have anything else that would provide needed economic growth in order to sustain lifestyles expected by populace. Thus, federal government will continue importing of “customers” for the real estate industry on the unprecedented scale (400K per year will soon become 500K or more) in order to keep the pressure (boiler room effect) in the market and provide the floor for the prices.
My worry is that government will not allow for cleansing process and will find the ways to prolong this car crash in slow motion for years to come.
Presently in Canada the only way success in life is measured is the size of the golden cage(sleeping pod) and thickness of granite counters. I am just not sure if anyone is realizing that Canadians are becoming docile and dormant. We might somehow limp to the finish line of having 100 million citizens(Canada 150 and beyond). Alas that number means nothing if the life goal for the entire populace is buying the house and having the chicken coupe in the back yard.
Not sure I believe in “the cleansing” (i.e. “correction”) anymore. Not sure what I believe….seeing as everyone in the BOC and GOC has given up on traditional monetary and fiscal policy wisdom. Maybe I’ll just drink the MMT koolaid and be a crazed, creepy fake one-world government proselyte.
I don’t think it’s going to be a “correction” anymore. It’s not going to be “real estate crashes” It’s going to be “everything collapses under the weight of real estate.” Much much worse.
Even though this trend of increasing more available investment dollars into real estate cannot be a longterm sustainable option for generating a healthy Canadian economy, I kind of believe that with the support of our ‘wise federal government’ (I’m being sarcastic here, just in case there is any doubt), they can perpetuate this wealth generation model through a couple of election cycles, which is all that really matters for politicians. All they really need to do is to ramp up their immigration efforts to bring more wealthy individuals (and turn a blind eye to money laundering dollars) into the country to keep buying up these new homes. This Ponzi scheme has a long way to go!