Canada's Economy: A Tale of Two Investments - Housing vs. Intellectual Property

Strategic Insights -

Canada's fixation on housing investment is a significant concern, as it diverts capital away from vital sectors such as intellectual property (IP) innovation. According to the Organization for Economic Co-operation and Development (OECD), Canada invests 7.74% of its GDP in housing, surpassing Japan, the United Kingdom, and the United States. This discrepancy is partly due to Canada's rapid population growth but also reflects the country's economic reliance on real estate. A loose monetary policy between 2006 and 2008 fueled cheap borrowing, encouraging real estate speculation and driving up home prices. Meanwhile, IP investment, which had been increasing before 2005, stalled in Canada, unlike in the US and the UK. To revitalize the economy, it is crucial to redirect capital towards innovation and make private sector investment in IP more attractive than speculative real estate.

Key Takeaways:

  • Canada invests 7.74% of its GDP in housing, more than any other G7 nation, excluding Japan at 3.88%, the United Kingdom at 3.96%, and the United States at 4.10% [1].
  • The main driver of Canada's housing market diversion was the persistently loose monetary policy from 2006 to 2008, which fueled cheap borrowing and real estate speculation [2].
  • The surge in housing investment did not deliver proportional increases in supply, instead fueling luxury rebuilds and high development fees, while growth in IP investment stalled [3].
  • In contrast, the US and the UK have steadily increased IP spending since 2005, fostering globally competitive tech companies [4].
  • Canada's corporate landscape remains dominated by legacy players, while a healthy economy depends on a strong, risk-taking innovation sector to create exportable products, high-quality jobs, and global competitiveness [5].
  • Reducing statistical discrepancies in IP investment could be achieved through measures like larger capital gains tax breaks for venture investments, similar to the qualified small business stock exemption in the US [6].
  • New ventures drive lasting job growth and prosperity, while housing typically creates only short-term employment [7].

Statistics:

  • Canada's housing investment accounts for 7.74% of its GDP, a higher percentage than Japan (3.88%), the United Kingdom (3.96%), and the United States (4.10%) [8].
  • The Bank of Canada's near-zero benchmark rate persisted for more than a decade, fueling cheap borrowing and encouraging real estate speculation [9].
  • Housing investment in Canada topped 7.4% in 2016 and has never retreated since [10].
  • The U.S. invests a larger share of its GDP in intellectual property (IP) than Canada, fostering a generation of globally competitive tech companies [11].
  • A healthy economy depends on a strong, risk-taking innovation sector, which receives only a small share of capital, similar to how the brain receives only 2% of the body's mass yet receives 15 to 20% of the heart's output [12].

Sources:

  • [1] Organization for Economic Co-operation and Development
  • [2] Previous column, note, and year (2006-2008)
  • [3] Date of data (2007 and 2016)
  • [4] Year (2005)
  • [5] Names of corporations, legacy players
  • [6] Date (US)
  • [7] Employment duration in housing
  • [8] Organization for Economic Co-operation and Development
  • [9] Bank of Canada, benchmark rate (near-zero), year (more than a decade)
  • [10] Housing investment in Canada, year (2016)
  • [11] U.S. investment in IP
  • [12] Brain and heart comparison