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Saturday , 25 March 2017
High cost of housing affecting business competitiveness, profitability: report

High cost of housing affecting business competitiveness, profitability: report

Ontario’s business community is in a “delicate” position, says the Ontario Chamber of Commerce in a new report. Most businesses (62 per cent) are confident that they will do well in the next twelve months, but only 24 per cent of them are confident in the province’s economic outlook, creating a wide “confidence gap.” Business seems to be prospering, but the fundamentals are weak, investment is being held back, consumer spending is slipping, the nature and composition of the labour market are changing, and the government needs to act.

The OCC uses a business prosperity index (BPI) to measure the relative prosperity of businesses today as compared to historical levels. It is now at a fifteen-year high of 48.5 per cent (it was 34 per cent at the turn of the century), but the organization is concerned that the prosperity derived from the production of goods (manufacturing) and services has fallen by 24 per cent, and financial services have been taking their place. This, says the OCC, puts Ontario’s future prosperity at risk. To make matters worse, Ontario consumers aren’t spending as much as they did before 2007, and this feeds into the lack of profitability from goods and services production.

Source: Ontario Chamber of Commerce

Looking at government figures about GDP would give a rather different impression, that the economy is actually doing quite well. A 2016 third-quarter economic report from the Ministry of Finance for Ontario boasts of stronger-than-average GDP growth, accelerated employment growth, stronger exports, stronger manufacturing, retail and wholesale sales, a strong housing market, and improved productivity. Business sector profits were up 6 per cent in the quarter, and household disposable income grew faster than consumption expenditure—people earned more than they spent—which led to improved household savings.

Altogether a very positive picture, from the government.

Business sees things a little differently, of course. Consumer activity is weak. Exports are “lacklustre.” And then there is housing. Housing and construction are enormously important to the economy, no one denies this. Real estate transactions accounted for half of all GDP growth in Canada in the second quarter of 2016, evidence of the shift from an economy based on manufacturing to one dominated by financial services. But the way in which wealth is generated, whether from business production or from investment activities, is important, the OCC argues, and the amount of prosperity arising from production sources has declined in Ontario. This has led to a higher-risk environment, in which businesses are less likely to invest and remain competitive.

Source: Ontario Chamber of Commerce

Housing costs affect staff acquisition

According to businesses, the single biggest challenge they face is acquiring suitable staff (53 per cent say this). Of those businesses that attempted to recruit a new staff member in the last twelve months, 86 per cent reported that they experienced “challenges” in doing so. Without the right employees to do the job, it is clearly harder for businesses to remain profitable. One of the factors at play in this is the high cost of housing. The OCC says that the high cost and relative unavailability of “appropriate” shelter makes it harder for Ontario to attract global talent, and thus reduces our competitiveness.

A major component of cost of living is housing affordability. Shelter-related costs have been gradually increasing across Canada, but in Ontario the challenge is even more acute . . . rising even more aggressively here than nationwide since 2010. Rising shelter-related costs (including transportation) challenge consumer engagement, impacting market activity, but also contribute negatively to labour market activity, as it becomes increasingly difficult to hire. Both the price and availability of appropriate shelter impact the ability of Ontario business to attract global talent, and reduces our competitiveness.

Related to the cost of housing is the problem of household debt. It surpassed the $2 trillion mark last December, about $1.4 trillion of that being mortgage debt. Our debt now exceeds the country’s GDP for the first time, even though, says the OCC, consumer spending has fallen. One reason for the drop in spending is Ontario’s high cost of living, a major component of which is housing, especially in Toronto.

Source: Statistics Canada

Further, the high level of indebtedness is, paradoxically, causing consumers to spend less, which has an impact on businesses. Consumer activity has not recovered since the 2008 recession, currently representing just 39 per cent of the recent strength, though it is a major contributor to economic growth.

Looking ahead, the OCC offers a generally positive outlook, with unemployment remaining relatively low, even as the province struggles to transition to a “disruptive, high-skilled economy,” in which less prosperity comes from “primary business activities.” The organization says that in 2017 it will focus on what it calls “structural issues” impeding business profitability, including workforce development, infrastructure, energy costs, and health care.

About Josephine Nolan

Josephine Nolan is the chief editor of—Canada's Condominium Magazine. You can reach Josephine via our contact form. She reads all her mail.

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