Capacity constraints can thwart housing affordability goals

Canada Mortgage and Housing Corporation (CMHC) estimated that by 2030, Canada needs to build 3.5 million more homes in addition to the expected 2.3 million homes under the business-as-usual scenario. We ran forecasting models and concluded that Canadians should not hold their breath for 5.8 million new homes.

Why? To more than double the rate at which Canada builds homes, we will need to increase significantly (double) the number of homebuilders' and developers' capacity to have the bandwidth to deliver even if constraints like municipal red tape, missing trillions of financing dollars, and developable/affordable land scarcity were addressed.

One wonders whether the current builders can double the housing supply rate or are willing to welcome new peers (probably international developers and builders) to lend a helping hand with building millions of new homes.

Sensing the opportunity and urgency, new entrants can be spotted in the homebuilding domain. The recent announcement by Leon's, a retailer specializing in furniture and appliances, to build 4,000 homes on a parcel they own could be a sign that many new entrants, some with a competitive advantage in homebuilding, such as Rona and HomeDepot, may expand into construction. That will be a welcome development, given the capacity constraints and the enormity of the challenge.

In the past 75 years, Canada has constructed a formidable 13.4 million homes. Yet, a stark reality casts a shadow over the future: the likelihood of fulfilling the country's housing needs seems a distant dream, if not an impossibility. The graphical tale before us isn't just a depiction of past endeavours but a window into a future riddled with challenges.

We ponder whether existing homebuilders and developers can double the housing supply rate or are willing to welcome new peers (probably international developers and builders) to lend a helping hand with building millions of new homes.

A word about the data plotted in the chart. We obtained housing starts data from Haver Analytics . We estimated an Autoregressive Integrated Moving Average (ARIMA) model using annual starts data from 1993 to 2023. The estimated AR1 model is first differenced with a drift and was used to generate the 10-year forecast.

We then generated a randomized time series that spread the 5.8 million CMHC forecasted starts over 10 years with an annual 580,000 starts and a standard deviation of 50,000. The red-coloured line demonstrates the upward-sloping annual construction rate needed to have 5.8 million dwellings built between 2024 and 2033. The construction gap is the space between what is likely to be built and what CMHC suggests needs to be built to restore housing affordability.

The 1970s are a testament to Canada's former glory in housing starts, with a record 2.4 million new homes built for a population that was half the size of today’s. Fast-forward to today, and the forecast is grim: we forecast a mere 2.4 million homes for the next decade under the business-as-usual scenario, a figure dwarfed by the staggering 5.8 million required to meet the demand. The gap is not just a numerical shortfall but a chasm of 3.4 million residences—a figure so vast it could house the entire current population of Quebec.

While many may point to municipal red tape, the scarcity of affordable, shovel-ready land, or a lack of investors and investment dollars, a latent element in this narrative is the beast of construction capacity constraints. It's a behemoth that could strangle millions of Canadians' hopes of affordable housing.

Capacity constraints are the chains that bind our ambitions. To double the number of housing starts, Canada would need to summon a Herculean effort to more than double the number of builders, tradespeople, and materials, not to mention the logistical nightmare of storage and transportation.

Canadian builders certainly possess excess capacity to supply more with existing endowments. But can they really go from 240,000 starts per year to building 580,000 dwellings? This isn't a challenge; it's a Sisyphean task in a country already grappling with labour shortages and supply chain disruptions.

The construction industry, strained by the demands of today, might not be prepared to shoulder tomorrow's construction burdens. It's a sector begging for a breather, not a double marathon. We also learnt this week that builder confidence has taken a slide in the last quarter.

The chart above is more than a collection of lines and numbers—it's the writing on the wall for Canadian housing. It illustrates not a gap but a gaping maw, ready to swallow the dreams of affordable homeownership and rental dwellings whole. The highlighted construction gap in the next ten years doesn't just represent data; it's the harbinger of a reality where affordability remains a buzzword rather than a tangible goal.

Canadians have been sold the promise of affordable housing for too long, but the numbers don't lie. The harsh truth is that housing affordability isn't just out of reach; it's sailing away on a ship that's not coming back anytime soon.

As policymakers and industry leaders scramble to find solutions, the Canadian populace must come to terms with the fact that the road to affordable housing is not just uphill—it's a mountain whose peak is shrouded in the clouds of capacity constraints and economic reality.

Shoring up the construction industry by the public and private sectors to meet the construction challenge is one way of helping Canadians retain their dream of affordable homes. A concerted effort by the federal and provincial governments will be needed first to determine the throughput capacity of Canadian builders and the desired construction industry's size to meet the housing challenge.

We recommend the following strategies as a starting point to meet the homebuilding challenge that will require attracting large builders from the US, China, and elsewhere to enter the Canadian housing market. It will also require attracting tradespeople from the EU (skilled in construction) who were pushed out of the UK after Brexit. It will require expanding the capacity of colleges and apprenticeship providers to create an expanded workforce for homebuilding.

Maybe 5.8 million homes built in ten years is an unrealistic target. However, even a 20 percent increase in the current construction rate will require much more than what has been done or proposed to meet the housing challenge.

If housing affordability is a goal and not just a dream, concrete efforts must accompany the promises.

Regionomics Inc. is a Canadian consultancy specializing in applying data science and machine learning tools to find solutions for urban challenges. If you would like more information, please contact Murtaza Haider at [email protected].