For years, Canadian policymakers have been sleepwalking past a growing housing affordability crisis. Now, with homes seeming impossibly out of reach to so many and voter discontent on this issue poised to roil upcoming elections, they have been jolted awake and are looking for solutions. Any action on this issue is welcome, but the biggest fix of all has yet to be raised: giving households the buying power to keep up with rising home prices today and tomorrow by boosting Canadian productivity.

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It’s hard to overstate the scale of the crisis we’re facing on housing affordability. According to the Bank of Canada’s Housing Affordability Index, which measures the percentage of household income required to own a home under typical financing requirements, affordability is at its worst point since the early ‘90s. Over the past 25 years, average household disposable income has risen three per cent annually, while home prices have jumped six per cent per year on average. These trends have only accelerated in the past decade, a period in which household incomes in Canada effectively stagnated even as peer countries, especially the United States, experienced stronger income growth.

These trends have been felt intuitively by most young couples that have sought to find a new home for themselves in recent years. Belatedly realizing the scale of the problem, officials are trying to incentivize new home construction in a long overdue recognition that decades of underbuilding has led to a supply shortage and high home prices. While this is a welcome move, it will take years of aggressive home construction to correct the imbalance — time that many Canadians cannot afford to take before purchasing. As a result, many homeowners have taken on a significant level of debt to buy a home. For example, the average size of a mortgage in Toronto has ballooned from just over $300,000 in 2012 to north of $500,000 at the end of 2023. Canadian households are now the most indebted in the developed world.

With the cost of debt rising due to higher interest rates — and access to it also increasingly constrained — Canadians can no longer exclusively rely on cheap debt to allow them to become homeowners. That is why policymakers must also focus on improving households’ ability to purchase housing by promoting household income growth. The reality is that Canada’s structural affordability problem has as much to do with poor income growth as it does with runaway house price growth. Improving income growth would reduce the gap with housing costs, helping not just potential homeowners but also renters. In practical terms, this means making Canadian productivity — the value of an hour of work — much higher.

What would a productivity-focused agenda look like? It would mean reinvesting in — or at least, getting out of the way of —Canada’s most productive industries, such as mining, natural gas and utilities. It also means promoting investment in productive industries such as technology to drive growth instead of relying largely on government spending. Programs to improve workers’ skills, making them more competitive in the global marketplace, would help greatly. So too would steps to curb excessive taxation and regulation on sectors with high growth potential, along with reducing long-standing inter-provincial trade barriers.

Our immigration policies can be retooled to strengthen productivity as well. Right now, we are not adequately integrating the massive number of new immigrants into the workforce or attracting workers into value-adding industries. Canada rightfully has tremendous appeal to people from all over the world, and we should be selecting for those with the skills to further develop our productive capacity.

Actions like these are long overdue to get Canadians’ standard of living to the point where housing affordability isn’t a massive drain on families’ finances. While Canada ranks among the top countries to live in, its productivity doesn’t even hit the top 10 compared to other countries in the Organization for Economic Co-operation and Development (OECD). That productivity grade is also a proxy for how well Canada competes — which is poorly — where productivity is a measure of GDP per capita.

Canada is ranked 18th, with a GDP per hour worked at 42.5 percent of No. 1-ranked Ireland. Compared to the United States, Canadian productivity diminished by nine percent between 2000 and 2022, falling to roughly 72 per cent of that of the U.S. This is a major reason why Canadian income levels are now much lower than average American income levels compared to being on par back in the 1960s and 1970s.

We can get there again. A productivity-minded policy agenda, complete with continued homebuilding, is the best way to ensure the next generation of Canadians can affordably own a home — and the best way to strengthen the economy and standard of living for everyone at the same time.

Carl Gomez is chief economist and head of market analytics for CoStar Group Canada

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