Canadians Now Pump More Into Residential Real Estate Than Business Development

Canada’s economy is so dependent on housing, more money is now invested in homes than businesses development. Statistics Canada (Stat Can) data shows investment in non-residential structures, machinery and equipment is down sharply in Q4 2020. The issue isn’t a lack of investment dollars though. Money is just being pumped into residential real estate. In fact, residential investment has now grown to a larger share of GDP.

Non-Residential Structures, Machinery and Equipment (M&E)

Non-residential structures, machinery and equipment (M&E) is capital used for new business activity. The non-residential structure portion is commercial buildings used for business activity. Machinery and equipment is split into two – information and communications technology (ICT) and non-ICT. ICT includes things like telecom equipment, software, and computer equipment. Non-ICT includes things like specialized machinery for production. Basically all of the things businesses invest in during expansion. 

In case it isn’t obvious why this is important, it’s how companies improve productivity and expand. Adopting new tech is closely associated with increasing individual employee productivity. Increased productivity means increased business activity, and generally an improved economy. When capital is cheap, it’s usually cheap to try and attract this kind of investment.

Canada’s Investment In M&E Falls Over 12%

Despite increased incentives, Canada is failing to attract more M&E investment. The segment only saw $181.73 billion in Q4 2020, when seasonally adjusted at the annual rate. This is 12.79% lower than the same quarter a year before. To contrast, residential investment hit $213.82 billion in the same quarter, up 22.45% from a year before. Investment isn’t slow. Housing is just attracting a much bigger share of capital.

Investment in residential structures is now 17.66% higher than investment in M&E in the last quarter. This isn’t just a pandemic problem either. Historically, M&E had been about 30-40% higher than residential investment. That was prior to the housing boom, when Canadians worked in the economy. Around 2015, M&E was only 20% higher than residential investment. The rate in contrast to GDP was extremely low, even before the pandemic hit.

Investment In Housing Is A Bigger Share of The Economy Than M&E

To really get a sense of scale, you need to see how this trend evolved as a percent of GDP. At 7.88%, M&E is now at the lowest percent of GDP on record. Even a year ago, when the economy was “booming,” the ratio was only 8.89%. That level is about the same as it was for a single quarter in 2009. Canada was experiencing recession like investment into building and expanding businesses pre-pandemic.

Canada’s Economy Goes All-In On Housing

Canadian residential investment compared to non-residential structures, and M&E. Expressed as a percent of GDP. Source: Stat Can, Better Dwelling.

Residential structures on the other hand, have continued to see investment pour in. At 9.27% of GDP, residential investment is consuming nearly a tenth the size of all economic output. A year before, it was 7.45% of GDP, and already considered too high of a ratio. For comparison, US residential investment peaked at 6.7% of GDP during the height of their housing bubble in 2006. It’s now below 5%, and considered to be getting too high for some.  

Leaning on housing is a cheap move for growth, but at some point it becomes the only trick people understand. Now that the two have flipped, it’s going to be difficult to get people to invest in things outside of real estate. Good luck convincing people to invest in business, when their home is making more than they could at work. 

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