Canada’s approach to housing is bad for the economy

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Canada’s poor labour productivity is in the news these days, with The Economist recently slamming the country’s performance, while reports of weak business investment suggest worse is yet to come. But when accounting for the problem, there are few better places to start than with that oft-heard Canadian boast: “My house has been my best investment.”

When housing is a great investment, it can be a symptom of a sick economy. I’ve written at length on why Canada’s housing boom has encouraged the misallocation of capital to non-productive uses. But the problem runs deeper than that. Canada’s entire approach to housing and urban planning is arguably holding the economy back.

Take the sprawl of Canadian cities. Tokyo fits 14 times the population of Ottawa into a similar amount of space. That’s typical. A 2018 Queen’s University study concluded that Canada’s cities are best seen as vast suburbs, with more than four-fifths of the country’s population living in the bedroom communities that radiate far out from city centres. All this infrastructure creates heavy deadweight costs for the economy while making it difficult to create productivity-enhancing forms of public transit, as Ottawa’s own struggles with light rail have shown.

Worse, it lengthens commute times. The odd person may look forward to their me time with their favourite podcast or morning radio show, but for the most part research shows that lengthy commutes are bad for productivity. Compare Paris and Toronto, two cities with similar populations but very different densities. The French, famed for their long vacations and early retirements, are comparatively productive workers in no small measure because they, like most Europeans, spend less time getting to work.

It’s not just that time spent in traffic produces nothing. As it lengthens, it also tends to diminish mental health, which is itself bad for one’s performance at work. This is easy enough to grasp. Just think of the popularity among North American tourists of Airbnb holidays in Paris or Rome, where you wander out the door to a theatre or restaurant. Especially when accompanied by good green spaces, research suggests that high-density housing improves mental health, in contrast to suburbs, where a life of journeying from house to car to shop and back can fuel a sense of social isolation.

Meanwhile, when real estate accounts for much of an economy’s wealth, it tends to steer both investment decisions and state policy toward unproductive outcomes. Firms that hold real estate have been shown to be less productive than those that don’t; their collateral makes it easier to get credit than firms that, even if more dynamic, are property-poor. Equally, politicians find it hard to resist policies that juice property values when homeowners make up such a large share of the population, even if those policies inhibit growth.

Home ownership itself can slow the economy. Efficiency depends on matching skills to jobs, which requires factor mobility. If you lose your job or if you just have better opportunities elsewhere in the country, it’s much easier to pack up and leave if all you need to do is end a tenancy. Homeowners, for obvious reasons, tend to hang on and make do with jobs where their skills may not be most useful. And as property values rise, all workers become less mobile, owing to the sheer cost of moving. Germany, another country with comparatively good labour productivity, enjoys the edge it does largely because it remains to a large extent a society of renters.

Real estate evangelists will quickly ask: If renting is so great, why are so many Canadians so keen to get on the property ladder? The answer may be that Canadian laws tend to favour owners over tenants. In Germany, where tenants enjoy far more rights, investing in rental properties tends to get taken on only by those looking for a stable income stream. Preserving rather than growing wealth, it produces a model in which renting remains an attractive, even lifelong option.

Being car-loving homebodies – Canadians own much bigger houses and spend less on dining out than Europeans – many see all this as a reasonable price to pay for the lives they want to lead. But falling productivity will ultimately force tough decisions. Moreover, the high carbon intensity that results from this model of urbanization may store up future problems. Canada’s major trading partners, including the U.S., are decarbonizing steadily and in the future may implement carbon border taxes to penalize relative laggards such as Canada. As a trade-dependent country, that could impose a steep tax on our lifestyles.

As Canada welcomes record numbers of immigrants, it needs to get serious about housing them. That creates an opportunity to think about how to future-proof our cities and the economy. Ditching the cult of real estate and the car-focused city may be a good place to start.

John Rapley is a political economist at the University of Cambridge and managing director of Seaford Macro.