There's only so much capital to go around. Governments directing more of it into housing leaves less for productivity and income growth
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By Steven Globerman
In the minds of most Canadians, there’s little connection between housing affordability and productivity growth, a somewhat wonky term used mainly by economists. In fact, the connection is very real.
To improve affordability, the Trudeau government recently announced various financing programs to encourage more investment in housing, including $6 billion for the Canada Housing Infrastructure Fund and $15 billion for an apartment construction loan program.
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Meanwhile, Carolyn Rogers, senior deputy governor of the Bank of Canada, recently said weak business investment is contributing to Canada’s slow growth in productivity (essentially the value of economic output per hour of work). Therefore, .
But here’s the problem. There’s only so much financial capital at reasonable interest rates to go around.
In economic terms, Canada is a “small open economy,” so it might seem that Canadian investors have unlimited access to offshore financial capital at whatever the going world rate of interest is, but this is not true. Foreign lenders and investors incur foreign exchange risk when investing in Canadian-dollar denominated assets, as well as the risk any investor or lender faces that investments will not turn out as profitably as hoped. Suppliers of financial capital naturally expect to receive higher yields on their investments for taking on more risk. Hence, investment in residential housing (which the Trudeau government wants to promote) and investment in business assets (which the Bank of Canada warns is weak) compete against each other for scarce financial capital supplied by both domestic and foreign savers.
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To get a sense of the proportions involved, investment in residential housing was 22.4 per cent of total investment in 2000 but rose to 41.3 per cent in 2021. Over the same period, investment in two asset categories critical to improving productivity — intellectual property products, including computer software, and information and communications equipment — fell from 30.3 per cent of total domestic investment to 22.7 per cent. In sum, in 2000 housing investment was only about two-thirds of what we might call “productivity investment” but by 2021 it was almost twice as great.
What’s to be done?
More financial capital might become available at existing interest rates for both housing and productivity-enhancing business assets if investment growth were to decline in other asset categories, such as transportation, roads and hospitals. But these assets also contribute to improved productivity and living standards.
Some advocates propose we increase regulatory and legal pressures on Canadian pension funds to invest more in Canada. That could free up domestic savings for increased investments in housing, machinery, equipment and intellectual property products. But such a policy would amount to an implicit tax on Canadian pension plan members to subsidize other investors. And it would worsen the risk-return trade-off faced by the pension plans millions of Canadians depend on to fund their retirements.
Another approach to increasing domestic savings would be to increase consumption taxes (e.g., sales taxes and GST) while reducing or even eliminating taxes on capital, including taxes on capital gains, which reduce the expected after-tax return to investing in businesses, particularly new and emerging domestic companies involving higher risks. Of course, the recent federal budget indicated that, quite the opposite, the Trudeau government plans to increase capital gains taxes. That will likely reduce the total supply of capital precisely as Ottawa tries to get Canadians to invest more in housing and productivity.
Finally, especially if they increase the tax burden on investment, governments should reduce the regulatory burden on private-sector businesses, particularly small and medium-sized enterprises, so that financial capital and other resources currently used to comply with duplicative or excessive regulation can be used instead to invest in productivity-enhancing assets. Governments could also eliminate restrictions on foreign investment in large parts of the Canadian economy, including telecommunications, banking and transportation. The resulting increase in competition would also likely increase productivity. And to the extent that large foreign investors would prefer to manage their own Canadian assets rather than take portfolio positions in Canadian-owned companies, eliminating such restrictions would also arguably increase the supply of foreign financial capital flowing into Canada.
Both more housing and higher productivity would almost certainly improve the lives of Canadians. But government subsidies to home-builders, including the billions the Trudeau government recently announced, simply shuffle domestic savings from one set of investments to another. Our policy goal should be to increase the availability of risk-taking financial capital so that the costs of capital do not rise as governments push their favoured investment projects.
Steven Globerman is a senior fellow at the Fraser Institute.
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Opinion: More capital for housing likely means less for productivity
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01.05.2024
There's only so much capital to go around. Governments directing more of it into housing leaves less for productivity and income growth
You can save this article by registering for free here. Or sign-in if you have an account.
By Steven Globerman
In the minds of most Canadians, there’s little connection between housing affordability and productivity growth, a somewhat wonky term used mainly by economists. In fact, the connection is very real.
To improve affordability, the Trudeau government recently announced various financing programs to encourage more investment in housing, including $6 billion for the Canada Housing Infrastructure Fund and $15 billion for an apartment construction loan program.
Subscribe now to read the latest news in your city and across Canada.
Subscribe now to read the latest news in your city and across Canada.
Create an account or sign in to continue with your reading experience.
Meanwhile, Carolyn Rogers, senior deputy governor of the Bank of Canada, recently said weak business investment is contributing to Canada’s slow growth in productivity (essentially the value of economic output per hour of work). Therefore, .
But here’s the problem. There’s only so much financial capital at reasonable interest rates to go around.
In economic terms, Canada is a “small open economy,” so it might seem that Canadian investors have unlimited access to offshore financial capital at whatever the going world rate of interest is, but this is not true. Foreign........
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