Time to lend more to business and less to homeowners

By Paul Kershaw, originally published in The Globe & Mail on May 5, 2023

Canada’s addiction to high and rising home prices has made our country lazy when it comes to planning for economic growth. This has hurt the finances of younger Canadians and newcomers, while ballooning the wealth of older homeowners.

Our country badly needs a new strategy to promote economic prosperity through a shift in lending and borrowing from mortgage loans to business loans. This is crucial regardless of whether you care about generational fairness, or just plain-old economic prosperity.

The largest part of the Canadian economy is driven by real estate, rental and leasing, which includes mortgage lending and borrowing in owner-occupied homes, sales by real estate agents, revenue from rental fees and more. At 13 per cent of our national gross domestic product (GDP), this industrial sector is bigger than manufacturing; bigger than mining, oil and gas; bigger than construction, health care, financial services, and all other industries.

Given that average home prices in Canada have increased by more than 300 per cent since 2000, it shouldn’t surprise anyone that real estate has grown as a share of GDP in all provinces over the past two decades, and often has been the fastest growing part of provincial economies. This is especially true in British Columbia, where real estate now represents 19 per cent of the economy.

Anchoring our economic prosperity on real estate, rental and leasing would be a fine economic development strategy if Canada was also generating a large portion of its employment in this same industrial sector. But we don’t. Fewer than 2 per cent of Canadians make their living in the real estate sector. No other industrial sector has such a big gap between its share of GDP and share of employment.

This gap highlights a major economic weakness – one that contributes substantially to Canada suffering very slow improvements to GDP per person compared with other large economies. The gap reveals that Canada has been growing our economy by increasing the major cost of living, without generating jobs in that industrial sector at a rate that ensures local earnings keep pace, especially in urban centres. Instead, small numbers of Canadians (notably realtors) enjoy very large incomes.

Meanwhile, homeowners like me gain equity in a way that drives worrisome wealth inequalities between owners and renters, and between older and younger residents. All the while, younger people and newcomers struggle to earn enough from full-time work to pay for their primary cost of living – housing. In 1976, it took five years of full-time work to save a 20-per-cent down payment. Now, it takes 17 years, and rents have been steadily rising as well.

So we must revisit the place of real estate in our economic strategies. It doesn’t make sense for our governments to claim they are good economic managers because GDP grows as a result of dramatic increases to our primary cost of living. Instead, it is time for an economic course correction that prioritizes reconnecting housing costs to local earnings in order to support employment and productivity in other industries.

This gives yet another reason to revisit the Home Ownership Tax Shelter. Policy that shelters housing wealth from taxation accelerates inefficient investment in real estate at the expense of capital investment in more productive sectors, including those that generate more employment.

It also means we must incentivize a shift in lending and borrowing away from mortgage toward business loans. Governments could collaborate with financial institutions to loosen lending terms for business in part by focusing on groups that face systematically more restrictive borrowing conditions, including women and people of colour.

Policies that work to reduce such biases may encourage business lending to marginalized groups without dramatically increasing credit risk for lenders. Expanding government support for initiatives like the Canada Small Business Financing Program, the Business Development Bank and peer-to-peer lending via the Lending Loop could advance this goal.

Yes, we must still channel enough private investment to build the new housing required by population growth. But we ultimately need to divert some mortgage lending toward business investment – especially mortgage lending that results in bidding up the price of already-built homes.

Lobby groups for manufacturing specifically, and business more generally, can play an important role. We need them to join forces to critique Canada’s overreliance on mortgage lending to fuel economic growth so that our country builds momentum to loosen lending terms for business loans that are more likely to fuel productivity and prosperity.

Over the short term, the shift from mortgage to business lending may coincide with slower GDP growth while we wait for investments in industries beyond real estate to spark productivity. That’s okay, as urged by the “beyond GDP” movement led by groups like the Canadian Wellbeing Knowledges Network, and even the Government of Canada’s own Quality of Life Framework – Measuring What Matters.

Canadian voters must become increasingly agnostic about GDP growth, because it’s been bad for younger Canadians and newcomers when it’s been powered by real estate.

There is little reason to fret over lower GDP growth when it is caused by policy changes that purposefully increase well-being by slowing down home prices so that earnings from full-time work have a chance to reconnect.