Judging by the news some days, a reasonable person might assume there was nothing to Ontario’s economy except the Toronto housing market. That would, of course, be wrong: even most Torontonians can recall once having driven past a farm or factory somewhere in the hinterland. But the misperception matters, and it’s not just insular 416 smugness that’s to blame. A report from the Fraser Institute published earlier this month suggests Ontario’s economy has gone way off-balance, with the GTA housing market propping up an otherwise mediocre economy.
Titled “Ontario’s One Cylinder Economy,” the report makes a simple argument: private business investment in Ontario hasn’t fully recovered since its 2007 peak, and provinces (such as Quebec) that used to lag behind us on several measures (such as unemployment) are now pulling even. This somewhat bleak picture, however, is being papered over by the booming GTA housing market, which is filling households with easy credit and government coffers with billions of dollars.
“During 2016, housing accounted for 29% of income generated by Ontario’s economy, even before a further spike in housing starts and prices in the first quarter of 2017. This leaves growth in Ontario vulnerable to a cooling of its housing market,” writes author Phillip Cross. The Fraser Institute institutionally favours small-government and market-based policies, so it’s hardly surprising that Cross blames the high cost of doing business (especially energy prices and the minimum wage) for Ontario’s relatively weak economy.
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Parts of this take are unquestionably true. No less than Premier Kathleen Wynne has admitted that recent economic growth hasn’t been as broadly shared as she’d like to see. And the Financial Accountability Officer has warned that the province faces a major shortfall — as much as $3 billion by 2020 — if Toronto’s housing market goes south.
But the Liberals predictably bristle at the idea that the economy has atrophied so badly under their watch that housing is the only thing propping up the alleged house of cards.
“We are Canada’s largest chemical manufacturer and North America’s second largest financial services hub for employment. Ontario’s manufacturing industry continues to be an important part of our economy,” Finance Minister Charles Sousa said in an emailed statement to TVO.org.
“In North America, Ontario ranks third in Foreign Direct Investment, after New York and California,” Sousa added. That’s not too shabby considering New York has Wall Street and California has an economy the size of Canada’s.
Michael Dolega, a senior economist at TD, rejected the “one-cylinder economy” criticism but didn’t deny the charge that housing has generated a disproportionate share of the province’s growth lately.
“Looking at construction, rentals and leasing, and finance … those three industries contributed almost half of all the economic growth over the past couple of years. It’s definitely significant,” Dolega says. “Residential investment as a share of GDP is at its highest since 1989, and we all know what happened after 1989.”
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If you weren’t around then, it was the collapse of what was at the time a pretty spectacular property bubble. TD's Dolega isn’t predicting a U.S.-style housing collapse in Ontario, but he does see the economy slowing from about 2.9 per cent real GDP growth this year to 1.9 per cent in 2018 — in part, yes, because of a housing cool-off, but also because of uncertainty around trade and other issues.
A 30 per cent slowdown in the economy largely attributable to a deflating housing bubble would seem to make the Fraser Institute’s argument: 1.9 per cent growth isn’t exactly red-hot. But Dolega points out that would basically bring Ontario back in line with the rest of the country — we still wouldn’t be a laggard.
While manufacturing and business investment has struggled in this province since the recession, Dolega says that’s not just an Ontario story. Meanwhile, he says the Fraser report glosses over some notable recent successes, such as healthy job growth in professional, scientific, and technical services.
In this telling, the housing market is a looming problem — somewhere between “moderately unsustainable” and “oh god oh god where’s the fire escape?!” depending on your outlook — but that’s true whether Ontario’s economy sputters or roars. Either way, when it ends it’s going to be messy.
The province’s environmental commissioner, Dianne Saxe, once described the development-planning complex in this province as “Ontario’s oil sands.” She meant that the way we build our cities is responsible for the growth in our greenhouse gas emissions, but ever since I read that I haven’t been able to shake the sense that it’s also true economically. There’s more to Alberta’s economy than just oil, but that province was buoyed for a decade by unsustainably high crude prices. Similarly, there’s more to Ontario’s economy than just housing, but we’re going to have to find something else to do when the boom times end.
Ontarians who’ve been smug about our province outpacing Alberta the past few years may want to reconsider that, and soon.