Canada's housing market correction presents a rare opportunity for a much-needed policy reset. For decades, public policy has centered around supporting homeownership, relying mainly on demand-side measures that helped fuel today's overly expensive market. Since the early 2000s, home prices have far outpaced incomes. Meanwhile, underinvestment in other productive assets, such as machinery, equipment, and intellectual property, has resulted in a lopsided economy and weakened Canada's productivity performance.
Housing Market Downturn Offers a Chance for Change
Recent data from the Canadian Real Estate Association show a housing market that is at least on pause. Sales were down year-over-year in every month from January through April, while the benchmark price of a typical home also fell year-over-year in every month — clear signs of a downturn. The country is also now in a technical recession, with the latest GDP reading confirming what many Canadians had already been feeling — growth has at least stalled. Recent data from Statistics Canada show an economy that is losing momentum and struggling to find a clear source of growth.
Policy Levers Have Boosted Housing Demand
Instead of continuing to lean on policy levers that have boosted housing demand and contributed to the current imbalance, Ottawa should use this moment to let capital move toward other sectors, where it will strengthen Canada's productivity and support broader long-term economic growth. Canada's outsized reliance on housing as a driver of economic growth has come at a steep cost. Our collective focus on real estate has driven household debt to levels nearly equal to Canada's annual economic output, placing us among the world's most indebted countries. This has resulted in a widening productivity gap with the United States, which invests 40 percent less than we do in residential construction but two times more in productive assets.
Inflationary Risks from Residential Construction
There are also mounting inflationary risks. Residential construction costs continue to rise even as pandemic-era demand has normalized, which suggests the sector is operating at capacity. These pressures are spilling over into non-residential construction, increasing the cost of critical infrastructure and further constraining economic growth.
Homeownership Incentives Have Missed the Mark
Canada's preoccupation with homeownership is understandable. Housing hits people — literally — where they live. But the policy response has missed the mark. Although governments have multiplied incentives to support homebuyers, housing has not become affordable. First-time homebuyers continue to be older and increasingly come from wealthier backgrounds, suggesting these measures have had limited market-wide impact. In many cases, incentives have created the illusion of helping while in fact worsening affordability by fueling demand. Programs such as the First Home Savings Account have proved most attractive to higher-income households, but that means they have often benefited people who would have bought homes regardless. The GST rebate on new homes is relatively narrow in reach and unlikely to materially improve affordability.
