People Mentioned
Special Advisor, Ottawa
Through the 1990s and early 2000s, economic growth in Canada was balanced across several sectors, reinforcing its position as a stable economy underpinned by strong banks and disciplined monetary and fiscal policy. But over the last two decades, as interest rates declined and housing supply for a growing population shrunk, the economy’s exposure to housing has increased sharply. According to a report from the Canada Mortgage and Housing Corporation, the country has the highest level of household debt in the G7, owing more than $1.70 for every dollar of their disposable income.
To discuss how Canadians’ high household debt burdens relate to overall economic growth, productivity levels, business investment, inequality and long-term economic resilience, Osler Special Advisor and former Governor of the Bank of Canada Stephen Poloz appeared on a recent episode of the Business Data Lab’s podcast, Canada’s Economy, Explained, with host Marwa Abdou.
Nearly half of Canadian household wealth tied up in real estate assets, making less money available for spending in other areas of the economy, partly due to a historical preference for homeownership.
“What it means, then, is that the financial system is directing many of its resources straight into housing, as opposed to into capital investment, which has a growth element to it,” Stephen explains.
“You buy a house, the economy doesn’t grow. But if that same money goes into new machinery, or equipment, or intellectual property investment, then you’re building a bigger platform for future growth in the economy.”
High housing costs are one factor affecting growth, but Stephen suggests the country’s overall investment environment — influenced by policy shifts like higher environmental review standards and Indigenous reconciliation efforts, as well as geopolitical developments like the end of NAFTA and negotiation of CUSMA — is a much larger one.
Those factors, he says, “created an investment environment that was highly, highly unpredictable for people.”
Looking to the future, Stephen says, “I think the fastest way for us to insulate ourselves, or build resilience, is to strengthen our growth platform and get business up and running on that fourth industrial revolution fast and early. And to facilitate that, you invest in those safety nets…that allow people to make the transition into a new career.”
As advances in artificial intelligence and other technology power this next industrial revolution, Stephen underlines the importance of ensuring that those changes don’t leave people behind, which will decrease political polarization and volatility.
“I believe it’s the inequality that is the driver of that, and that issue is kind of being left lying there…. Governments need to understand that what you see is not as bad as it gets; the fourth industrial revolution will widen that K-shaped trajectory for the economy much more, and probably give us even more polarized politics and make it even harder for us to decide things, to change our policies in ways that will be more person-centric.”
And while elevated household debt increases our vulnerability to interest rate increases and other shocks, Stephen says that tools like the mortgage stress test, which ensures that borrowers can handle the increased monthly payments that come with higher interest rates, and other levers exist to reduce risk.
“We have a full system that is designed to reinforce our financial stability, to put up guardrails, to prevent us from becoming too fragile.”
You can listen to the full podcast episode on the Business Data Lab website or wherever you get your podcasts.
People Mentioned
Special Advisor, Ottawa
