Canada

Canada Might See Capital Flight After Real Estate Overtakes Private Investment: NBC

Canadian real estate has outgrown productive investment for a few years, but it’s never been this bad. National Bank of Canada (NBC) found that Canadians now invest more in homes than businesses. It’s the first time since the early 1960s that housing investment has grown larger than private investment. The “Big Six Bank” says this has forced domestic pensions to put most of their cash to work abroad. If this continues, they warn Canada will have a severe capital flight issue.

Fixed Capital Stock

Fixed capital stock is the accumulation of material and immaterial investment assets. It breaks down into two major segments, non-residential and residential.

Fixed non-residential capital stock is things like machinery and factories. It’s capital to earn or facilitate creating more productivity. That’s why it’s often called productive investment. Non-residential capital is welcome since the greater economic output is generally good.  

Fixed residential capital stock is the country’s investment in housing. It includes capital sunk into building new homes and major renovations. It’s where your country’s labor lives. The issue is that it’s a non-productive asset and does minimal to grow an economy continually.  

Non-productive investment can do the opposite of grow an economy, tbh. It diverts money into servicing debt, which otherwise would have been spent in the economy or invested. Since debt is an IOU to claim wages from workers’ future productivity, it slows future growth.

An economy needs places to live and resources to conduct work, so healthy investments in both segments are required. However, it becomes an issue when residential investment absorbs more capital than non-residential. In this scenario, people put more money into where they live than resources for conducting work. That is what’s happening in Canada. 

Canadians Are Investing More In Housing Than Business For The First-Time Since 1961

Canadians now devote more capital to housing than private investment. The total capital stock reached $5.5 trillion in 2020, with just over half in residential investment. Residential represented $2.8 trillion, and non-residential was the remaining $2.7 trillion. Stat Can said this is the first time this scenario has occurred since 1961. That was the year they started tracking it, so it may go back much further. This time really is different.

Canadians Are Investing More In Housing Than Private Businesses For The First Time Since 1961

Canadian net fixed residential and non-residential capital stock. 

Source: Statistics Canada; Better Dwelling.

Canada Has Been Heading In This Direction For The Past 5 Years

The year 2020 was exceptional, but this trend began much before last year. It actually goes back to when the US Federal Reserve declared Canadian real estate a bubble. “Growth-enhancing investment is lagging in Canada, a trend that was evident even before the pandemic… While the pandemic most certainly exacerbated this decline, we note that the 5-year moving average has been on a downtrend for several years,” said NBC’s chief economist, Stefane Marion.  

Canada Is Risking Capital Outflows

“Whatever the cause of this lack of private investment, we must turn it around. Canada is very dependent on foreign money to finance its current account, which is likely to return into a deficit in 2022. If our growth prospects look unattractive in a post-pandemic world, capital flight could ensue,” he warned investors. 

When housing is soaking up the majority of capital, little is left to conduct business. Either there’s too little incentive to invest, corporate bonds yield too low, or consumer spending is minimal. It creates an unattractive environment, especially while other economies hit their stride.  

As an example, Marion points to Canadian pensions lowering their investment exposure in Canada. By his calculations, domestic pensions had 90% of their assets in the country in the early 1990s. That share is now less than 30%, including a 10 point drop since 2020. Obliterating the fixed income markets has also sent institutions looking for risk abroad.

“Clearly, we are not doing very well when our own domestic pension funds prefer to invest heavily abroad rather than in Canada,” he adds. 

Combine this data with a sharp drop in self-employment across Canada, and you might start to understand the issue. It’s hard to convince people to build a company when homes return 20% annual gains. The government also provides leverage and subsidizes debt to invest in this area. It’s doing this after backstopping any adverse outcomes throughout 2020. Few people even believe home prices could fall due to the moral hazard created.  

Why start a business or fund a company when you can make more in housing? That’s the question more people are asking themselves, and an absence of business investment is the result. Investing in an economy is riskier than investing in housing. Apparently, people don’t have to work. They can just trade homes back and forth. 

11 Comments

COMMENT POLICY:
We encourage you to have a civil discussion. Note that reads "civil," which means don't act like jerks to each other. Still unclear? No name-calling, racism, or hate speech. Seriously, you're adults – act like it.

Any comments that violates these simple rules, will be removed promptly – along with your full comment history. Oh yeah, you'll also lose further commenting privileges. So if your comments disappear, it's not because the illuminati is screening you because they hate the truth, it's because you violated our simple rules.

  • Alex 5 months ago

    With our central bank and our government basically perpetuating the problem, and unwilling to acknowledge the consequences, our residential sector will end up collapsing in on the weight of itself, taking our entire economy with it.

    What a shame to see a country with such productive capacity and such skilled citizens turned into effectively a publicly funded Beanie Baby convention.

    • John Sharpe 5 months ago

      Yes, very sad indeed. I read that in great part investors (like me) are to blame. Really? The BoC rate is low, local governments for various political reasons impose restrictions on building thus lowering supply…..and I’m blamed when I decide to invest in real estate and get a 20% ROI? And now my sons, engineers and software developers are going to the USA…..because the get paid more and homes are not $800K….there $400k. We are a very short-sighted country.

    • Scott 5 months ago

      We’ll said Alex. It is a shame. If this keeps up, Canada will be carved up by China, America and Russia. Canada will be southern Ontario…

    • Raman singh 5 months ago

      People who have equity are making the best out of it. The other day I was at my barber’s, there was a random fellow who was stating how he was able to secure 14 Pre-construction houses near Brampton just by using his equity. This is crazy!!!

      I am not mad at this guy at all as he is working on making his wealth and the future but I somewhere feel it is a bit of inequality when it comes to us (first-time home buyers). No matter how many incentives govn. come up with but the prizes we see in the charts are crazy and will keep us renting forever.

      As s first-time home buyer, we feel desperate to reach the target and live with our average salaries.

  • freddy 5 months ago

    The only purpose of working people and business owners in Canada is to support real estate speculators. They tax the hell out hard working people in order to prop-up flippers. The BoC prints money (diluting moneys value) in order to provide more and more cheap loans to speculators.

  • Cosmo 5 months ago

    If you go for a drive around southern Ontario during the week between 9am-5pm any day you will notice the roads are PACKED (even outside of lunch hours). A large proportion of people do not work – they are busy renovating their houses. This is their new job.

  • Abhi 5 months ago

    Canada was a great place to immigrate to with a ton of business of opportunity. When we first arrived, almost all of my family was able to start businesses and earn a good living. Now it would be very hard. New people to Canada can barely afford to rent a space never mind earn a living.

  • Calvin Ni 5 months ago

    If everyone is doing flipping or on the way to do the flipping, who the hell will do the real job. Sad.

  • JJ 5 months ago

    A radical change is imminent! Either the institutions take it upon them to fix things or circumstances will force it upon us!

  • Tejbir 5 months ago

    There should be more supply of houses.
    If more immigrants are coming, more students are coming, it should be easy for governments to understand that we need more houses. Why not all levels of governments have a common agenda to create a better supply of houses. Give more permits to build homes. Develop more small communities. Make more roads and public transport so people can travel to their work from less expensive towns. Governments have better brains who can come up with even better ideas,how to solve this problem. They should be thinking of solving the problem not just winning the elections.

    • Jim The Builder 5 months ago

      and where do we get the shortage of lumber, cement, crude, etc. to build as they increase the number of homes that can be built?

      People don’t realize half of the price increase is due to the increase in cost to build because they’re trying to double the amount of building in no time, but the materials and labor to build don’t exist.

Comments are closed.