Former Bank of Canada Governor David Dodge is warning the influx of cash into the domestic housing market threatens to suck the air out of the room when it comes to investment in growing the domestic economy.

In an interview Wednesday, Dodge, now a senior advisor at the law firm Bennett Jones, said the red-hot Canadian housing market is attracting investment dollars that could be better deployed into productivity-boosting assets like machinery and equipment.

“The very high level of construction that we’re seeing in the residential sector is indeed likely to continue for a little while,” he said.

“Our problem is not that we’ve not done the residential investment … our problem is that the investment that we’ve been making has been poured into housing, and not enough has been poured into machinery and equipment and intellectual property, which will actually raise productivity and output in the future.”

Home prices across the country have surged during the pandemic, as Canadians seek out more space during the work from home era. That’s helped spur robust homebuilding activity – housing starts are currently running at a 276,000 annualized pace, well above the roughly 210,000 pace seen pre-pandemic.

That frenzied housing activity has been a key crutch for the domestic economy. Indeed, Statistics Canada said housing investment “led the recovery” in the first quarter, as it surged 26.5 per cent year-over-year.

Dodge said there was no silver bullet to address the shift in investment away from productivity-enhancing equipment to housing, but emphasized that policymakers must set out a clear investment environment to incentivize businesses to deploy capital.

“It’s incumbent on business and government to work together on that issue. [It’s important that] government is clear in setting out its regulation and the environment going forward so businesses can have confidence to make the investments,” he said.

Dodge said that with that clear regulatory environment in place, businesses could then pick up the baton and invest in new equipment, rather than returning capital to shareholders.

“On the business side, [it’s important] that more effort – and let me use that word in a broader sense – more effort is put into reinvestment both in plant and equipment and intellectual property and less into distributing the returned earnings out in the form of dividends or share buybacks,” he said.

“It’s incumbent on both sides, business and government to make a much bigger effort and recognize that the only way forward to rising standards of living is that we raise our output in this country and that means devoting more of our current resources to investment in the future and less to consumption.”