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The Canadian economy is suffering from a deep structural imbalance: an overallocation of capital toward residential real estate at the expense of more productive investments.
Housing and productivity were at the heart of the Liberal Party of Canada’s promises during the last election. Once elected, Mark Carney moved quickly, dedicating more than $13 billion over five years to build affordable housing.
Although homeowners remain part of the political agenda — the budget introduces a GST rebate for first‑time homebuyers — they now share space with tenants. The homelessness crisis, the surge in renovictions, and the sharp rise in rents have brought attention to the needs of 60,000 unhoused people and 5 million renter households.
By focusing housing policy on access to housing rather than access to ownership, the Carney government is adopting the human‑rights‑based approach of the National Housing Strategy, with the additional goal of boosting national economic productivity.
Reducing dependence on housing capital
Can this first Carney budget reverse Canada’s dependence on real‑estate capital?
In recent years, the Canadian economy has suffered from a deep structural imbalance: a significant overallocation of private capital toward residential real estate at the expense of productive investments such as machinery, R&D, workforce training, and technological innovation.
The home‑ownership model functioned until recently thanks to low interest rates and relatively affordable house prices. That model no longer holds. Amplified by decades of public policies favouring homeownership, this dynamic has created an economic trap whose consequences are felt both in national productivity and in housing affordability.
The share of total investment dedicated to the residential sector — measured by gross fixed capital formation — is higher in Canada than in any other OECD country. This preference for residential real estate as a financial asset comes at the expense of investments that generate productivity gains essential to economic growth, including transportation infrastructure, research and development, and industrial machinery.
Real estate: A favoured asset class
This massive investment in a low‑productivity asset can be explained in part by federal interventions. Although independent, Canadian monetary policy encouraged mortgage borrowing by keeping the policy rate below 5 per cent for 23 years (2001–2023), including 10 years below 2 per cent (2008–2022) .
In addition, several federal measures — including the FHSA, the Home Buyers’ Plan, GST/HST rebates on new housing, the home‑purchase tax credit, and, indirectly, immigration policies — have stimulated demand for residential real estate.
These measures created a context in which residential real estate became a more attractive asset class than investments that generate profits and productivity. Housing ceased to be treated primarily as a durable consumption good and became a favoured investment vehicle due to tax incentives and historically low interest rates.
A complete vicious circle
The financialisation of housing has had profound consequences. Rising home prices have enriched owners, but they have also increased the precarity of tenants and young people.
More troubling is that this phenomenon diverts capital that could have supported innovation or industrial production — sectors capable of generating the productivity gains the Canadian economy urgently needs.
The vicious circle is complete: low productivity limits income growth, making housing less affordable, pushing governments to multiply home‑purchase incentives, which further drive prices up and divert even more capital away from productive investment.
A necessary change of direction
To escape this impasse, Canada must fundamentally reorient its housing approach. At first glance, the first Carney budget appears to aim for this objective by removing residential production from a purely financial logic and prioritising non‑market and cooperative housing, shifting policy toward the creation of affordable homes rather than stimulating the real‑estate market.
This transformation does not aim to crash prices — which would trigger a major financial crisis — but to stabilise them by massively increasing the supply of affordable housing outside the speculative market.
Removing housing from the market
Canada has one of the most market‑exposed housing stocks in the OECD. While non‑market housing (social housing, non‑profit cooperatives, units with rents controlled by a non‑profit or municipal housing authority) represents an average of 7.1 per cent of housing across the OECD, 14 per cent in France, and 16.4 per cent in the United Kingdom, it only accounts for 3.5 per cent of Canada’s housing inventory.
Budget 2025 includes several measures aimed at increasing this share. The Build Canada Homes initiative is the clearest example. This federal agency’s mandate is to provide new affordable housing units to new cooperatives and non‑profit landlords. It aims to build 4,000 homes on six federal sites (Dartmouth, Longueuil, Ottawa, Toronto, Winnipeg, and Edmonton) and to enable the construction of 45,000 non‑market homes on nineteen additional Canada Lands Company sites.
Breaking down interprovincial barriers can tackle the housing crisis, too
In partnership with the Nunavut Housing Corporation, it will build 700 additional homes and invest $1 billion in transitional housing to address homelessness.
The Co‑operative Housing Development Program, created in 2022 with an initial $1.5-billion investment, has allocated $423 million to build eight new housing co‑operatives totalling 837 homes. To support financing, the budget proposes facilitating access to guarantees and mortgage‑loan insurance for the purchase or construction of collective rental housing. CMHC will be able to reduce financing risks for the non‑market sector.
A federal strategy to accelerate housing construction
To make real estate less attractive as a long‑term investment vehicle, the budget proposes rapidly and sustainably increasing the supply of new homes. In its new housing policy, the federal government also seeks to involve the private sector by acting on the three production factors.
Land: Build Canada Homes and Canada Lands Company will use federal lands.
Capital: Build Canada Homes will rely on prefabricated housing and innovation in construction methods and materials, leveraging economies of scale and added value.
Labour: The budget increases the Union Training and Innovation Program by $75 million over three years to train workers essential to construction, helping address labour shortages.
These measures should increase the supply of non‑market housing at relatively low cost to the public treasury. In addition, the Government of Canada’s planned budget cuts explicitly exclude housing‑construction programs.
Obstacles to reform
Achieving this paradigm shift will require a long‑term policy sustained consistently over a generation. The proposed transformations will face significant headwinds, as they challenge the interests of major economic and political actors:
- Homeowners, who rely on their homes to finance retirement in a context where pensions are becoming less common, may see their savings decline if prices fall.
- Developers may see margins shrink if falling prices undermine their financial models.
- Financial institutions could lose mortgage clients to the social and rental housing sectors.
These groups, all deeply invested in the status quo, represent considerable electoral weight and will pose structural opposition to ambitious reform. Provinces and municipalities may also resist federal intervention in zoning and permitting — areas within their jurisdiction. To complete its reform, the Carney government will need to exercise considerable political skill to navigate these resistances. More importantly, it will need to demonstrate that dependence on real‑estate capital is not simply a housing‑affordability issue: it also suppresses productive investment and constrains Canada’s economic prosperity.
To restore economic growth, Canada will need to loosen the grip of market‑based real‑estate development, particularly in financing and zoning. Breaking free from dependence on real‑estate capital and investing in non‑market development will allow the country to unlock its economic potential.
