By Jock Finlayson, ICBA Chief Economist
Canada is sitting on $7.4 trillion worth of fixed assets, yet we’re still grappling with a housing crisis and sluggish productivity. With more than half of our physical capital tied up in residential buildings, it’s time to ask: Are we investing enough in the right kinds of capital to secure our economic future?
According to Statistics Canada, the value of Canada’s total “net capital stock” stood at $7.4 trillion last year, a slight 0.2% drop from 2022. Of this, residential fixed capital constituted some $4 trillion – amounting to a hefty 54% of the country’s entire physical capital stock.
The overall capital stock encompasses several categories of fixed assets – houses of all kinds, non-residential buildings (e.g., factories, warehouses, universities, hospitals, commercial and office buildings, etc.), engineering infrastructure and related assets, machinery and equipment, and intellectual property products.
Canada’s residential capital stock has grown considerably faster than the non-residential stock, particularly in the 2000s. Measured in inflation-adjusted dollars, the value of the residential capital stock overtook the non-residential capital stock a few years before the onset of the COVID-19 pandemic, with the gap widening since 2020. One consequence of this pattern is that the stock of productive capital available to Canadian workers has diminished in size and quality in recent years, a worrisome trend that has contributed significantly to the country’s stagnating productivity.
Even so, the reality is that Canada faces a housing shortage, in addition to a shortage of non-residential capital in the broad business sector. Some estimates indicate the country needs to at least double the pace of homebuilding to meet both the current and the projected need for housing. This suggests that large amounts of investment will continue to be allocated to the housing sector, with the value of the nation’s stock of dwelling units expected to remain on an upward trajectory in the foreseeable future.
Valuing the housing capital stock is a multi-step process, one that involves tracking the construction of new dwelling units, the amount of renovation spending, the demolition of existing units, and the effects of depreciation. Figure 1 shows Statistics Canada’s most recent estimates, covering the period 2019 to 2023. There was a sharp drop in residential investment in 2022-23 from the peak level recorded in 2021 (not shown in the figure).
Figure 1
The same data are available for B.C. and Alberta.
In common with Canada as a whole, the housing sector accounts for a little over half (52%) of the total fixed capital stock in British Columbia. The picture in Alberta is different. There, non-residential fixed assets make up almost two-thirds of the overall fixed capital stock, reflecting the outsized role of the capital-intensive oil, gas, pipeline and chemical/petrochemical industries in the province’s economy. Indeed, Alberta is far ahead of the other provinces in the stock of non-residential fixed capital per resident and per worker.
Considering the urgent need to invest more to expand and improve the capital stock in both the housing and non-housing sectors, it’s clear that Canada’s prevailing economic growth model – which has relied heavily on stimulating consumption and expanding the size of government – requires a major overhaul. To establish the conditions that will support both productivity growth and higher real incomes over the medium and long-run, Canada must redirect more of its collective GDP toward investment. This means a smaller fraction of GDP will be available to pay for consumption-related activities and to fund public sector programs and services. If policymakers are serious about tackling Canada’s “productivity emergency” and reversing the country’s eroding global competitiveness, they have no choice but to adopt a different economic growth model… one that prioritizes investment over consumption. It won’t be easy. The best that can be said is that Canadians are in for a difficult few years.
