Built on Shaky Ground: How Canada’s Housing Policies are Hurting Economic Growth

Canada’s economy has developed a serious housing habit. Real estate isn’t just where Canadians live or invest their savings, it has become the engine (and, some would say, the addiction) driving our national economy. Home prices have soared far faster than incomes, and new construction can’t keep up with population growth. At the same time, productivity and innovation are languishing. This is no coincidence. When so much of our collective wealth and effort is concentrated into bidding up the price of houses, it leaves less fuel for the industries and ideas that truly drive long-term prosperity. The culprit behind this imbalance isn’t greedy realtors or developers; this is a direct result of government policies – excessive development fees, sluggish approvals, and restrictive zoning – that have constricted housing supplies. The result is an affordability crisis and an economy that’s overly reliant on ever-rising real estate values, starving other industries of the capital and talent needed to drive long-term growth and innovation.

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An Economy Built on Real Estate

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In recent years, real estate has overtaken every other sector to become Canada’s largest industry by GDP. As of last year, the real estate and rental leasing sector generated roughly $303 billion in output – the single biggest chunk of Canada’s GDP – eclipsing traditional powerhouses like manufacturing ($203 billion) and oil and gas ($118 billion)​. If you combine it with related financial services (think mortgages) and construction, real estate-related activity now makes up about 28% of our entire economy. In plain terms, one out of every four dollars of GDP in Canada now comes from housing, property transactions, and financing. This is far above historical norms and higher than in many peer countries.

Visit any booming suburb or downtown core and you’ll see it: armies of construction cranes, tradespeople, and realtors making a living off the property market. In 2023, Canada’s construction industry employed about 1.58 million workers – nearly 8% of all jobs – and that’s not counting real estate agents, mortgage brokers, property managers, and other related roles. Real estate has become a pillar of both jobs and wealth creation in Canada. Home ownership is not only a social expectation but also a financial strategy – a bet that ever-rising property values will secure one’s future. Indeed, for many Canadians, housing is not just an investment; it is the investment.

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But what happens when a country starts staking its growth on building and selling houses to itself? It distorts the economy, inflating short-term GDP while starving the industries that drive long-term prosperity, are less sensitive to interest rate fluctuations, and are critical for global competitiveness. At the height of the recent boom, Canada devoted roughly double the share of its GDP to housing than the United States did, and about 3 percentage points more than even Australia, another country famed for its property fervor. Housing was, by far, the largest destination for Canadian investment dollars in the 2010s. Meanwhile, investment in the kinds of things that boost productivity – machinery, equipment, technology – has lagged. Canada spends only around 5% of GDP on non-housing business investment, roughly half the rate of the U.S. In short, we’re plowing money into houses instead of factories, R&D labs, or startups.

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The Opportunity Cost of an Overheated Housing Market

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Every dollar that goes into an overpriced home is a dollar that isn’t starting a business, funding a breakthrough, or improving industrial productivity. By pouring so much of our national wealth into bidding up home prices, we are undermining our ability to generate wealth in other ways. Housing has an opportunity cost – and Canada is feeling it. As investor Martin Pelletier bluntly put it, “The problem with real estate is that it’s a non-producing asset… once it goes into real estate, that money’s gone.”​ You can’t extract more economic value from a house just by paying more for it. There’s no magical productivity boost when a bungalow in Toronto jumps from $500,000 to $1 million in five years. It’s the same house, just with twice the debt attached. “There’s no continual compounding economic spinoff from that investment,” Pelletier warns​. In contrast, a dollar invested in a new software company, or a piece of high-tech machinery can generate new income streams, exports, and jobs.

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The data bears out these concerns. In recent years Canadians have been spending as much on home renovations and transaction costs as we invest in all machinery, equipment, and intellectual property combined​. That is a startling statistic – it means our society now funnels as much capital into granite countertops, hardwood floors, and real estate agent fees as we do into improving our productive capacity. Our business investment has consequently been anemic. Trevin Stratton, an economic advisor at Deloitte, notes that business investment in Canada has been “flagging,” causing our productivity growth to trail other countries​. It’s hard for Canadian firms to compete globally when they’re underinvesting in technology and efficiency.

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Another hidden cost of sky-high housing is its impact on talent and innovation. If young people can’t afford to live in our thriving cities, or if all their disposable income is eaten by rent or mortgages, it stifles entrepreneurship and mobility. Why take the risk of starting a new venture if doing so means sacrificing the chance to ever own a home? Why move to Toronto or Vancouver for a great job if you’ll never be able to buy there or even find a reasonably priced rental? Canada’s ability to attract and retain skilled workers is at stake. Royal Bank CEO Dave McKay has warned that if we don’t solve affordability, “it’s too expensive to live here, we don’t attract the talent, we don’t retain the next generation”​. I personally know talented individuals in high tech industries who are considering leaving Canada for better opportunities in the US.

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The flight of professionals to other countries – economic migration – is a major concern for the Canadian economy. As skilled workers seek more affordable living elsewhere, we risk losing not only tech professionals but also essential service providers like doctors, engineers, and others who form the foundation of our society. Canada boasts one of the world's most educated populations, yet as housing affordability declines, so too does our greatest asset – our people.

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Policy Failures: Fees, Red Tape, and Restrictive Zoning

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So how did we get here? It’s easy to point fingers at speculators or developers, but industry players are ultimately responding to the incentives and constraints set by policy. The real blame lies with government policies and bureaucratic red tape that has choked the supply of housing, inadvertently (or sometimes deliberately) driving up prices. For years, municipalities have piled on development charges, onerous zoning rules, and protracted approval processes. These barriers act like a heavy tax on new housing construction, slowing the pace at which we can build and making each unit significantly more expensive.

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Start with development charges – the fees cities charge builders to fund new infrastructure like roads and sewers. In principle, “growth pays for growth” sounds reasonable. In practice, development charges in many Canadian cities have gone through the roof, adding a huge premium to the cost of each new home. Consider Ontario: between 2004 and 2024, an analysis of 27 municipalities found every single one increased development fees far above the inflation rate (which was 54% over that period). Some cities hiked these charges by as much as 800%. Today, the government-imposed charges (development fees, levies, taxes) on a new home in Ontario average around 31% of its price​. In the Greater Toronto Area, development charges alone can add up to $184,000 to the cost of an average new house​. City halls, strapped for cash, push more of the burden of paying for infrastructure onto new home buyers, but that in turn makes those new homes unaffordable for many, so they never get built, meaning nobody gets housed and the city doesn’t get the new tax revenue either. By contrast, some other Canadian cities have kept development charges lower (a comparable new home in Calgary faces about $22,000 in development fees​, a fraction of Toronto’s), and it’s not a coincidence that housing tends to be more affordable where the extra costs are lower.

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Then there are restrictive zoning rules and land-use prohibitions. For decades, Canada’s fastest-growing cities have constrained most residential land to single-family homes only – effectively banning multi-unit housing (like townhouses, duplexes, and apartments) across vast swaths of urban land. In Toronto, for example, most of the city’s residential land was until very recently off-limits to anything other than detached houses​. This has been dubbed the “yellowbelt” of the city – stable, low-density neighborhoods where growth is frozen. The story is similar across the country including municipalities like Vancouver which had zoned roughly 70-80% of its residential neighborhoods for single-family homes (though recent reforms are starting to open things up), and many suburbs still fiercely resist more dense residential projects. The intention was to preserve neighborhood character; the consequence was to severely limit the supply of new housing in the areas where demand is highest. With most urban land effectively off-limits to intensification, new development got pushed to far-flung suburbs or forced into a handful of high-density nodes – neither of which has kept up with the need. As the RSM Canada economics team noted, “lengthy approval times and restrictive zoning laws… put a hammerlock on development.”​ Simply put, we designed our cities in a way that makes it incredibly hard to add housing, and we are now reaping the consequences.

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Even when a developer does manage to assemble land and propose new homes within our zoning constraints, they then face some of the slowest approval timelines in the developed world. From rezoning hearings to environmental assessments to building permits, getting shovels in the ground is a marathon, not a sprint, in Canada. Average residential projects in Ontario take approximately 25.5 months (about 775 days) to obtain permits and approvals. A global “ease of building” index ranked Canada 34th out of 35 OECD countries for construction permitting speed – only Slovakia was slower​. This is a rather embarrassing statistic for a G7 nation. Each delay adds costs: architects and engineers must be kept on retainer, land financing accumulates interest, and construction crews sit idle. One study found that approval delays can add between 8% and 14% to total construction costs per year. These costs, of course, get passed directly to the homebuyer or renter in the end.

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It’s not that governments have been entirely oblivious to these problems. We’re starting to see some policy shifts – but many are half-measures relative to the scale of the crisis. Ontario, for instance, has moved to cut red tape and encourage density: the province’s latest housing plan will “streamline planning regulations and approvals processes” and force cities to set minimum housing targets​. The federal government, for its part, launched a $4-billion Housing Accelerator Fund intended to reward cities that speed up approvals and update zoning. And just this fall, Ottawa removed the GST (a 5% federal tax) on new purpose-built rentals to spur apartment construction. These are welcome moves, but they tinker at the margins of a fundamentally strained system. So long as municipalities continue to lean heavily on development fees to fund infrastructure and impose restrictive zoning, new housing will remain artificially scarce and expensive.

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Why More Affordable Housing Helps Everyone – Even the Industry

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There’s a common misconception that bringing home prices down (or even under control) would hurt the real estate industry and broader economy. After all, if houses cost less, wouldn’t builders, agents, and lenders all make less money? In the short term, a speculator flipping a house for a quick profit might prefer prices to keep spiking. But the health of the housing sector – and the economy at large – ultimately depends on volume and sustainability, not ever-increasing prices. A market where homes trade at reasonable multiples of income will see more transactions, more new development, and more associated economic activity than one where prices are so high that buyers are perpetually sidelined.

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We are seeing this play out now. The rapid price rise of the past decade, combined with higher interest rates, has slammed the brakes on housing developments. When only a tiny fraction of families can afford a home, sales stagnate. When projects are no longer penciled out because of levies and levitating land costs, construction slows. In the Greater Toronto Area, for example, new condo sales have plummeted – down 81% in 2023 compared to the 10-year average, according to industry data​. Developers have shelved or postponed many projects, despite the housing shortage, because they worry units won’t sell at prices that cover the inflated costs. The number of construction cranes in Toronto has dropped by over 20% this year, each crane representing jobs for dozens of tradespeople​. Realtors, who only earn commissions when transactions occur, are seeing slower business. Landlords are earning lower rental yields, with many individual landlords in negative cash flow positions. Trade and construction workers face job uncertainty with housing starts faltering. Retailers and furniture companies feel the pinch too – if people aren’t moving into new homes, they’re not buying appliances, furnishings, or renovation materials. The entire ecosystem around housing thrives on turnover and volume growth, not high prices.

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Canada’s real estate sector boomed for years on ever-escalating prices, but if homes become prohibitively expensive, the industry’s customer base dries up. By contrast, if we aim for a stable, accessible housing market, the real estate sector may lose the sugar high of speculative gains, but it gains a foundation for long-term vitality. The sooner policymakers and industry leaders recognize this alignment of interests, the sooner we can break out of our high-price/low-volume trap.

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The Path Forward and Rebalancing the Economy

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Rebalancing Canada’s housing market and economy will not be easy, but it is both necessary and achievable. The good news is that we know what the solutions are – it’s a matter of mustering the political will and coordination to implement them. Here’s how we can start turning things around:

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• Build More Homes, Faster. Canada needs a construction surge akin to a post-war rebuilding effort. CMHC has estimated we need to build millions of additional housing units by 2030 to restore affordability. Hitting this goal will require streamlining every step of the development process. Municipal approvals should happen in months, not years. Provinces can impose “fast track” rules – for example, if a city doesn’t approve a project that meets all requirements within, say, 12 months, it could automatically be allowed to proceed. Embrace technology to expedite permitting. Cut down on endless consultations that give a small minority veto power over new housing that benefits the majority. Time is money, and we have no time (or money) to waste on bureaucratic delays.

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• Overhaul Zoning and Unlock Land. We need to fundamentally rethink how we use our precious urban land. Single-family-only zoning must become a thing of the past. Cities like Minneapolis and countries like New Zealand have already eliminated exclusionary zoning to allow duplexes and triplexes in formerly single-detached neighborhoods – and the sky hasn’t fallen. Following their lead, Canadian provinces and cities should upzone aggressively, especially in areas well-served by transit and jobs. This doesn’t mean 50-storey towers on every residential street; it means gentle density – townhouses, low-rise apartments, secondary suites, multiplexes – woven into the fabric of communities. Alongside this, we should repurpose underutilized land: obsolete commercial sites, old industrial lands, even excess parking lots can be converted into housing. The federal government, as a major landowner, has a role too – surplus federal lands in urban areas could be freed for development of affordable homes.

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• Rethink Development Costs and Incentives. It’s time to get creative about funding infrastructure without penalizing new home buyers. If we continue to load the costs of every park, pipe, and road onto the sticker price of new houses, we’ll never escape the affordability trap. Alternative funding models could include spreading infrastructure costs across the broader tax base – after all, the whole community benefits from growth, not just the people who move into the new homes.

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• Boost Productivity in Construction. Building more housing isn’t just about policy and money; it’s also about capacity. Canada faces a shortage of skilled trades. To tackle this, we can expand training for skilled workers and also embrace innovation in construction methods. Modular and prefab building techniques, for example, can speed up construction and cut costs if scaled up.

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• Keep Speculative Demand in Check. Going forward, we should be cautious about policies that artificially stimulate housing demand. Instead, focus demand-side policies on curbing the speculative purchases that distort markets.

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• Embrace Innovation and Entrepreneurship. Canada’s economic future depends on fostering a culture that values efficiency, innovation, and smart risk-taking. While the U.S. has the best risk capital availability in the world, Canada lags in both investment and adoption of new technology. Too often, businesses and consumers stick to outdated methods simply because they’re familiar - even when better solutions exist. This hesitation slows growth and makes industries less competitive. Governments should incentivize private investment in innovation, streamline regulatory barriers for startups, and encourage industries to modernize. On that note, if you're a property manager, realtor, landlord, or residential asset manager, check out my proud Canadian startup Tuze (www.tuze.ca) to boost your productivity and cut lost revenue with innovative technology.

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Ultimately, the goal of these reforms is to realign our economy. We need to move from one that is overly reliant on inflating home values to one built on real productivity and opportunity. Housing should go back to being the foundation for Canadians – literally, a roof over our heads that enables us to thrive in other endeavors – rather than the be-all and end-all of economic success. If we can restrain the excesses of development charges and red tape, a strange thing might happen-- housing could become boring again. And that’s a good thing. A more stable, affordable housing market would let policymakers and Canadians shift attention to other vital areas: developing talent, encouraging entrepreneurship, investing in high-tech industries and green infrastructure – the things that create wealth rather than just shuffle it around.

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Canada stands at a crossroads. Down one path is the status quo: housing stays unaffordable and growth sputters along, propped up by debt-fueled real estate transactions and frustrated aspirations. Another path is a rebalanced future: an abundance of housing that brings prices and rents back to reasonable levels, freeing our economy to diversify and flourish. Choosing the second path will require unwinding years of bad policy and overcoming entrenched interests that profit from scarcity. It will require courage from our leaders to tell younger Canadians that they are not in fact doomed to live in their parents’ basements forever, and to back that promise with action. It will require viewing housing as critical economic infrastructure – just like roads, bridges or telecommunications – that underpins our national well-being.

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The payoff, however, will be enormous: a Canada where a young family in 2030 can afford a home without winning the lottery, where businesses can attract global talent because workers know they can find a decent place to live, where banks channel more capital to commercial ventures than to monster mortgages, and where the real estate industry thrives by building and selling a high volume of quality homes instead of scavenging for a few insanely priced deals.

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We have the tools and the knowledge to make this vision a reality. It’s time to summon the will. Canada’s housing policies have long been part of the problem – they can, and must, become part of the solution. By cutting excessive fees, speeding up approvals, and embracing growth, we can bring housing back to earth and unleash the true potential of our economy. In doing so, we won’t be diminishing the real estate sector – we’ll be saving it from itself and securing a better future for young Canadians.

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