According to the latest data, Canada is experiencing an investment crisis. Policymakers in Ottawa have been slow to respond, despite some isolated warnings from key players including the Bank of Canada’s senior deputy governor. But unless investment improves, particularly in assets that enhance productivity, household incomes in Canada will continue to stagnate or even decline.

What’s the problem?

To increase productivity (and ultimately, incomes) workers require key assets including computers, software, machinery, equipment, intellectual property and research and development. The OECD groups these types of assets into two categories—communication technology equipment (ICT) and intellectual property products (IPP).

From 1990 to 2010, investment in ICT (as a share of total investment) in Canada was 12.6 per cent and 14.5 per cent in the United States compared to 10.1 per cent in Canada and16.6 per cent in the U.S from 2010 to 2021 (the latest year of comparable data). In other words, investment declined in Canada yet increased in the U.S.

The comparison is even less favourable for Canada when it comes to IPP. From 1990 to 2010, investment in IPP (again, as a share of total investment) was 13.2 per cent in Canada and 22 per cent in the U.S. compared to 12.7 per cent in Canada and 22.5 per cent in the U.S. from 2010 to 2021.

Clearly, Canada’s shortfall relative to the U.S. in productivity-enhancing investments has worsened since 2010, and it’s not a new phenomenon. Conversely, however, Canada has consistently outperformed the U.S. on investment in residential dwellings (i.e. homebuilding). From 1990 to 2010, investment in homebuilding (as a share of total investment) was 27 per cent in Canada and 21 per cent in the U.S. compared to 32.6 per cent in Canada and 17 per cent in the U.S from 2010 to 2021.

Obviously, people need housing, and Canada’s rapid population growth has substantially increased the demand for housing with a resulting dramatic appreciation in average home prices. From 2010 to 2022, Canada’s population growth rate, largely driven by increased immigration, was about twice that of the U.S.

But here’s the rub—in Canada, tax and regulatory policies, which favour of investment in homebuilding, may have stunted business investment in productivity-enhancing assets.

For example, government regulation has made business loans costlier compared to loans to households for housing-related investments. And when the Trudeau government recently increased the capital gains tax, it maintained the tax-free status of capital gains on owner-occupied homes. Here again, government policy favours investments in homes relative to ICT and IPP. And the waterfall of recent government subsidies and tax credits for homebuilding and home purchases will further tilt economic incentives away from investments in ICT and IPP.

It's not surprising that politicians respond to demand for more affordable housing by directing large direct and indirect subsidies to the housing sector. However, they should remember that housing affordability is essentially a ratio of average unit costs to average household income. Housing subsidies may reduce average housing costs, but if scarce financial capital is diverted away from investments in productivity-enhancing assets, average household incomes will stagnate or even decline in real terms. In short, you can’t separate housing affordability from productivity growth.

If policymakers want to reverse these troubling trends and meaningfully address Canada’s business investment crisis, they must enact policy reforms that make Canada more attractive to investors—not just homebuyers.