Canada's Housing Crisis: Unrealistic Growth Targets Fuel a Looming Disaster
Adrian C. Spitters, CFP?
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Unrealistic Growth Targets Deepen Canada's Housing Crisis
Canada’s housing market is facing an escalating crisis. While housing starts remain robust by historical standards, the market is buckling under the strain of misguided policy decisions and economic realities. Policymakers continue to push ambitious housing growth targets that are not grounded in the actual capacity of the market to deliver, resulting in worsening conditions for homebuyers and developers alike.
A Slowing Market Amid Population Boom
Recent data from the Canada Mortgage and Housing Corporation (CMHC) highlights a concerning trend. In September, new housing starts dropped by 15% compared to the previous year, even as Canada’s population is growing at a record pace. The six-month trend saw a slight uptick of 1.3%, but the broader picture shows a market losing steam. What’s alarming is that, despite these slowdowns, housing starts remain well above historical averages. The question is: why can’t this increase in starts meet the growing demand?
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The reality is that policymakers’ goals to triple housing starts were never realistic. Economists, including Robert Kavcic of BMO, have been sounding the alarm, warning that the housing sector does not have the capacity to scale up in line with these inflated expectations. "Canadian housing starts edged up to 224k annualized units in September, but activity continues to gradually grind softer," Kavcic explains, highlighting that the 12-month average of 244k units, while historically strong, is far from the growth needed to meet demand. In fact, it represents a sharp downturn from policymakers' unrealistic goal of tripling the housing supply.
Developers Caught Between Rising Costs and Weak Demand
Developers are stuck in an impossible position. They are building fewer homes just as demand for housing should be surging. Why? The answer lies in the high cost of construction. Soaring material prices, rising interest rates, and hefty development fees have made it nearly impossible for builders to reduce the prices of new homes, even as demand falters. These market conditions have trapped developers in a lose-lose situation where they can neither lower prices nor sell homes at the current inflated rates.
"Market conditions are making it tough for builders, with higher borrowing costs and, importantly, the disappearance of investors that are often leaned on to bring projects to the construction phase," adds Kavcic. Investors once made up the bulk of pre-construction demand in major cities, representing up to 70% of buyers. These investors, driven by the promise of quick returns, played a key role in driving housing prices higher by outbidding end-users. But with rising interest rates, the easy money has dried up. Without investor demand to rely on, many projects have been shelved, further limiting supply.
This development vacuum leaves regular buyers in an untenable position. End-users, or people buying homes to live in, still cannot afford to enter the market due to high prices and financing costs. This supply-demand imbalance continues to fuel the housing crisis, with no clear solution in sight.
Government Intervention: Well-Intentioned but Counterproductive
While the government has attempted to spur housing development through intervention, its efforts may be making the problem worse. Through a combination of state-backed multi-generational development loans and extended repayment plans initially designed for first-time buyers, the government has sought to maintain construction momentum. However, these policies have done little to alleviate the underlying issues of affordability and supply.
In fact, these interventions have created further inefficiencies. By keeping development costs artificially high, government policies have prevented prices from falling to a level where average Canadians can afford to buy homes. The result? A housing market that remains overheated and inaccessible, with no meaningful relief on the horizon.
Kavcic notes that "the 12-month average for multi-unit starts has clearly peaked and has been trending at around 180k since the tightening cycle began." Despite some support from purpose-built rental units, the market continues to tighten. Without significant reform, the housing sector may reach a breaking point, where both supply and affordability collapse entirely.
Unrealistic Expectations Are Deepening the Crisis
The real problem lies in the unrealistic growth targets set by policymakers. The goal of tripling housing starts not only fails to reflect the market's capacity but also puts immense pressure on a sector already strained by high costs and weak demand. These inflated projections mislead stakeholders, developers, investors, and homebuyers alike into believing that significant relief is on the way when, in reality, the housing shortage is only getting worse.
This disconnect between government policy and market realities is creating a perfect storm. By failing to align expectations with what the market can realistically deliver, policymakers are deepening the housing crisis, pushing Canadians further away from the dream of homeownership. As demand continues to outstrip supply, more and more Canadians are finding themselves priced out of the market with no end in sight.
Strategic Solutions: Turning Challenges into Opportunities
Navigating the current real estate downturn requires thoughtful planning. Strategic investment decisions can help different groups of Canadians protect their wealth and capitalize on emerging opportunities. Here are tailored strategies for first-time homebuyers, current homeowners, and investors looking to strengthen their portfolios in an uncertain market.
First-Time Homebuyers: Pause, Save, and Invest in Rental Real Estate
Jumping into homeownership during a downturn carries significant risks, especially with potential price declines on the horizon. First-time buyers are better positioned by focusing on building a solid down payment while exploring investments in purpose-built multifamily rental properties through private real estate investment trusts (REITs). These REITs provide access to real estate returns without the risks tied to direct homeownership. With rental property shortages and immigration fueling demand, private REITs offer steady income and long-term growth potential, making them an effective alternative for market participation.
Current Homeowners: Consider Selling and Renting
Homeowners facing rising mortgage rates may benefit from selling their homes and transitioning to renting. This shift can reduce financial pressure while providing flexibility. Funds from the sale can be reinvested into income-producing real estate assets, such as multifamily rental properties, through private REITs. This approach not only reduces exposure to further home value declines but also allows homeowners to profit from the increasing rental demand driven by demographic shifts and immigration trends.
Investors: Enhancing Portfolio Diversification with Private Real Estate
Investing in private real estate, particularly in multifamily rental properties, offers a stable way to diversify portfolios away from the volatility of public markets. These assets generate consistent rental income and provide the potential for long-term capital appreciation.
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The growing need for rental units, fueled by demographic changes and immigration, further strengthens multifamily properties as an investment. These properties distribute operational costs across multiple units, making them more resilient to economic fluctuations. During downturns, demand for rentals often increases, enhancing the stability of this asset class.
Investors can access these opportunities through private REITs or professionally managed real estate funds, which offer a hands-off approach without the complexities of property management. Incorporating private real estate into a portfolio not only enhances income potential but also mitigates market risks, providing a pathway to a more balanced and secure financial future.
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Disclaimer
The information provided is for educational purposes only and does not constitute financial, investment, legal, real estate, estate planning, wealth planning, financial planning, tax planning, insurance, or any other financial-related advice. It should not be viewed as a recommendation to buy, sell, or hold any financial products or assets. All investments, including stocks, bonds, private equity, private real estate, alternative assets, and precious metals, carry inherent risks, including loss of principal. Markets are unpredictable, and past performance does not guarantee future results. Diversification may reduce risk but does not ensure protection against loss. Real estate and precious metals are subject to market volatility, economic conditions, and illiquidity. Alternative investments, such as private equity, private real estate, and private debt, often involve complex legal structures, longer time horizons, and higher risk, requiring careful consideration and professional advice. Insurance, estate planning, wealth planning, real estate, and tax planning decisions, as well as any financial strategies, must be tailored to the unique circumstances, goals, and risk tolerance of each individual. Tax and legal implications vary by person and jurisdiction, and changes in laws can affect outcomes. It is crucial to consult with licensed financial, legal, tax, insurance, real estate, and mortgage professionals before making decisions. Forward-looking predictions are the opinion of the author and do not constitute financial advice. By using this information, you acknowledge it is general in nature and not a substitute for personalized advice, and you agree that the authors and affiliated entities are not liable for any financial losses or consequences from reliance on the content provided.
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