Building the Dream: Canada's Housing Supply Shortfall

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Canadians Are Investing Less Towards Building New Homes

In Canada, the dream of owning a home is drifting further from reality as residential construction investment takes a nosedive. BMO Capital Markets, a prominent Canadian financial institution, has issued a stark warning to investors and policymakers alike, shedding light on a concerning trend that could impact the future of housing in the Great White North.

Real (inflation adjusted) residential construction spending experienced a modest 1.6% rise in August. While that might seem like good news, it's essential to put it into perspective. This uptick was the first increase in a year and remains a staggering 27% below the previous year. In fact, this is the most substantial annual decline since 2011, and it's raising some serious concerns.

BMO's Senior Economist, Sal Guartieri, emphasized the gravity of the situation, saying, "The level is a little higher than during the darkest days of the pandemic." These words certainly don't bode well for the future of homebuilding.

This downturn isn't exclusive to traditional residential builders; it's a systemic issue. BMO points out that non-residential construction has managed to maintain spending levels from the previous year. So, what's driving this housing construction crisis?

"Labour shortages, expensive materials, and high credit costs aren't helping, nor are rising resale listings of late," said Guartieri. These factors are creating a perfect storm, making it challenging to provide affordable new housing for Canadians.

Fewer New Homes Are Starting Construction Despite Promises

Despite promises of more homes, Canada is witnessing a decline in new housing starts. The seasonally adjusted annual rate (SAAR) for new homes started in September stood at just 270,000 units. This number might sound impressive compared to pre-pandemic volumes, but it's still 9% lower than the previous year. In contrast to the peak observed in March 2021, the volume remains 16% lower.

It's clear that the rhetoric about increasing housing supply isn't matching the reality on the ground. Rather than a surge in new construction, there's been a notable pullback in the number of new starts. This disconnect is a cause for concern, especially as Canada grapples with a growing housing affordability crisis.

Canada Is Doubling Down On Its Real Estate Inefficiencies

The stark decline in residential construction is surprising, given Canada's booming population. However, the low-interest-rate environment has transferred a significant share of homebuying from end-users to investors. Many of these investors are operating at a loss, hoping that future price appreciation will compensate for their deficits.

As prices have stopped rising at the same pace, these investors can no longer drive demand. The gap between what investors are willing to pay and what end-users can afford has grown significantly, leading to a lack of demand. It's a complex issue, and tackling it early is crucial. Otherwise, governments may resort to re-stimulating investor demand, which doesn't address the needs of everyday Canadians.

BMO sees governments leaning toward an investor-driven model. Recent federal government initiatives to lower borrowing costs for developers and reduce sales taxes on the construction of rental units are seen as steps in the right direction. Guartieri adds, "But the hoped-for building boom could be delayed until the Bank of Canada chops interest rates." Lower interest rates may provide the necessary catalyst to reignite the housing construction industry.

This isn't the first time that BMO economists have pointed out flaws in the plans to increase housing output. One economist has even gone so far as to call Ontario's goal of building 1.5 million homes impossible. Building more homes is an appealing idea, but it's a complex challenge, especially in a globalized world where supply chain disruptions can drive up the cost of housing. And some argue that this might be the point all along, pushing for a more sustainable and affordable housing market in Canada.

It's evident that Canada's housing supply issue is a multifaceted problem. It requires a delicate balance between encouraging construction and maintaining affordability, all while navigating the intricacies of the global market. With BMO's insights in mind, it's essential for policymakers and stakeholders to work collaboratively to find a viable solution to ensure that every Canadian can have a place to call home.

With single-family homes becoming less affordable, many individuals and families are opting to rent instead of purchase. To learn how you can benefit, contact me at (604) 613-1693 or [email protected] to learn more.

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Credits: Canada Can't Double Housing Output. It Can't Even Stop It From Dropping