Canada, we have a problem and it’s time we talked.
Our love of real estate is not only creating a world where new homebuyers cannot enter the market, it is also massively distorting future opportunity.
I have built several businesses in my career, some successful, others not so much. Each business has been immensely capital-intensive, some have employed hundreds of people and most have done millions of dollars in revenues.
My track record is one that I look to with pride, but also with irritation. After 15 years of engaging in the back-and-forth of the cash-flowing business world, it strikes me that I could have done just as well investing in a bunch of real estate, sitting back employing no one, and simply riding the great Canadian asset bubble of the past decade.
That realization means that something is very wrong with our economy and the way it functions.
A lost decade
Western economies used to produce products and later on, services. Those products and services created enduring value, jobs and above all, innovation. But we in Canada have not engaged in such projects of late. Instead, we have experienced a lost decade — a decade where a significant amount of available capital and innovation has turned to constructing glass buildings in the sky.
Indeed, our present Canadian economy produces living quarters filled with indebted residents paying near New York City prices for Mississauga real estate. In the process, we have created small living space after small living space with no real, intrinsic value beyond the fact that the price of those same spaces continues to increase with every passing year.
We have, in short, collectively spent a decade creating nothing of enduring value beyond monetary multiplication.
What. A. Waste. There is something substantively wrong with an economy whose primary purpose is to house the people who are employed by the housing industry. To be clear, that is not just a fancy turn of phrase — Canadian housing is presently consuming 37 per cent of investment capital in this country. Such an economy will not and cannot lead the world into the 21st century.
Such an economy is, at its core, stagnant — an economy where investing in a room with a view is more valuable than employing hundreds of people in actual productive work.
We need governments that can refocus economic incentives around real business value and promote programs that foster enduring products and services with economic potential beyond Airbnb. This will involve unwinding any number of perverse incentives designed to foster real estate growth at the expense of everything else.
Perversions such as basic bank lending.
Have you ever tried to get a restaurant loan in Canada or a loan to start your own business? Good luck to you if you don’t have a house to pledge as security. But when someone who wants to enter the real estate market asks the bank for money for a condo, even though that person could lose their income and ability to pay a mortgage tomorrow, banks compete to offer government rates for the privilege of lending that same money.
Or consider the principal residence exemption, which is usable over and over again by individuals for any amount of money garnered from the sale of their home, as long as they lived in it. Compare that to the sale of shares of an active Canadian business, which is tax-free only on an amount of less than a million dollars and, even then, is only available for use once in a lifetime.
These perverse incentives exist throughout our system and need to be addressed if this country is to continue to remain on course.
Canada is hooked on real estate. We need to detox fast for our sake, for our children’s future and, above all, for all future aspiring business creators who would seek to develop their skills in a system that encourages rather than punishes their efforts.
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