The Fraser Institute report warns that with interest rates expected to increase, Toronto’s housing sector could collapse, leading to serious economic disruption.
Ontario, once the industrial powerhouse of Canada, has become precariously reliant on its booming housing market to fuel economic growth, warns a new report.
To show how Ontario’s manufacturing sector has slipped, the Fraser Institute report compares Ontario to Quebec, whose economy was historically weaker. Quebec now has a lower unemployment rate than Ontario, higher growth in GDP per capita, and more resilience in such sectors as lumber, paper, primary metals smelting and even installation of data centres.
Rather than encourage manufacturing, Ontario has relied on housing, which contributed 29 per cent to Ontario’s economic growth last year, says the report, Ontario’s One Cylinder Economy: Housing in Toronto and Weak Business Investment, released this Wednesday.
The report’s author, Philip Cross, who worked 36 years at Statistics Canada, warned that, with the Bank of Canada now expected to increase interest rates, Toronto’s housing sector could collapse, leading to serious economic disruption that would ripple across Ontario.
“Our society loves bubbles, because most people make a lot of money on it,” Cross said in an interview. “If the Bank of Canada is going to raise interest rates, this should reign in the Toronto and Vancouver markets, which are bubblicious.”
Cross said that the Bank of Canada had intended its low interest-rate policy of the past few years to “light a fire under the manufacturing sector in Ontario.” Cheap borrowing costs, a low Canadian dollar and low oil prices should, logically, have combined to spur investment in factories, he wrote.
But that is not what happened. Instead, Ontario’s high electricity prices, increases in regulation, high personal tax rate and hikes in the minimum wage have all conspired to depress Ontario’s manufacturing sector, which shriveled from 21 per cent of the Ontario economy in 2002 to 12 per cent in 2015, the report said. “Ontario’s electricity costs are the highest in North America for most businesses,” it notes. The last auto plant, Toyota, opened in Ontario in 2009, and since then carmakers have tended to shed workers, the report says.
“You can see the Bank of Canada pulling its hair out for the last couple of years going, ‘Why didn’t the manufacturing sector respond?’ ” Cross said. “It’s the high cost of doing business in Ontario.”
Low interest rates did help other provinces, the report found. “Ontario is the only province where manufacturing investment has failed to recover,” it said. While Ontario was sliding to have-not status in the period after 2003, manufacturing has risen 14 per cent in Quebec, 40 per cent in Alberta and 20 per cent in British Columbia.
Meanwhile, Ontario has become increasingly dependent on the real estate sector, particularly the hot condo market in Toronto.
“The Bank of Canada did not intend to cause a housing bubble in Ontario and B.C.,” Cross said.
Now, he is worried that this bubble will burst, and that Ontario, because of its reliance on that sector, will suffer.
“We in Ontario always look down our nose at oil and gas, that it’s clearly cyclical,” he said. “But there is nothing more cyclical than the Ontario manufacturing industry. And the Ontario housing industry is clearly more cyclical more cyclical than Alberta’s oil and gas industry. There is no reason to be smug.”
By Peter Kuitenbrouwer