Does Canadian Housing Have a Supply Problem, or Just Too Many Investors?

Written by Posted On Tuesday, 06 July 2021 00:00

As Canada deals with high real estate prices, soaring demand for homes and a lack of supply, experts in the real estate and financial industries debate what needs to be done to ease the issue.

Most of these commentators point to a lack of housing supply as the main culprit.

“While it is clear that interest rates and a shift in preferences for housing by type and geography (facilitated by remote work arrangements) contributed to the strength of the housing market, the fact remains that the principal challenge facing the housing market – and the underlying cause for rising prices and diminished affordability – is the substantial insufficiency of supply relative to demand,” says Jean-Francois Perrault, SVP and chief economist at Scotiabank.

“Canada has the lowest number of housing units per 1,000 residents of any G7 country. The number of housing units per 1,000 Canadians has been falling since 2016 owing to the sharp rise in population growth,” he says.

A study by housing consultant Will Dunning used demographic modeling to calculate how much housing should have been built in Canada since 2006 and compared that to how much was actually built. Dunning analyzed 36 major urban centres as well as the “rest of” the country.

He found that 32 out of 36 urban areas has under-produced low-density (semi and single-detached) homes.

“Housing shortages have contributed to rapid price growth during the past decade and a half,” says Dunning. “Recent heightened consumer interest in low-density housing means that the supply shortfalls are now contributing to extreme price growth. Given the large magnitudes of the supply deficits, we might see sustained pressure on pricing for some time.”

Robert Kavcic, senior economist and director of economics at BMO Economics, says the current situation is “the culmination of more than a decade of supply and demand-side forces that, almost by design, predictably got us to where we are today.” He cites Ontario’s Places to Grow Act from 2005, which “set off down a long road toward single-detached home scarcity around Canada’s biggest market.” He says through the 1990s and early 2000s, housing starts for single and multi-unit properties were roughly in line with each other. But by 2019, when there were about 30,000 multi-unit homes built, there were only about 4,000 single-family homes started. Most municipalities are targeting intensification rates in the 40 to 60 per cent range, he says.

“The thing is, the idea that families want to live in dense, smaller and walkable urban spaces is a bit of a fairy tale,” says Kavcic. “Young families want space, and they need it at a time before the baby boomers are ready to move on from those coveted properties, and after 15 years of crowding out single-detached development. The exodus to smaller markets during the pandemic is a good example of the pressure finding a relief valve.”

Toronto real estate broker John Pasalis says those who believe increasing housing supply will solve all our affordability problems are ignoring the huge imbalance between the number of low-rise and multi-unit buildings that are going up.

“Our federal government plans to increase immigration targets to support the country’s economic recovery post-pandemic – but how do policymakers plan to house all these new immigrants? By building an ever-increasing number of 600-square-foot condominiums favoured by investors and proportionately fewer family-sized houses each year?” Pasalis says.

Kavcic says that investors own about a third of the condo market in Canadian cities, according to Statistics Canada.

Pasalis adds, “When new housing supply is driven almost entirely by investors it can lead to a number of potential risks that tend to undermine overall housing affordability and the economic health of end-users who are already in the market.”

He says investors often base their buying decisions on the belief that “prices can go up forever because there’s not enough supply” and are willing to “pay significantly more than end-users. This is partly why pre-construction condominiums in Toronto sell for much more than resale condos.”

Most of the investor-owned condos end up in the rental market. “As the share of condominium completions increased over the past 10 years, the share of new housing completions bought by investors and used as rentals has increased while the share of homes intended to be lived in by the end-user owner-occupier has declined,” he says. “This expansion in investor-financed rental units over end-use units explains why over the past 10 years, home prices have doubled while average rents are only up 30 per cent.”

Beata Caranci, SVP and chief economist at TD Bank Group, says it’s time to “take this bull by the horns and apply solutions where they are most needed. Let’s start by getting timely, publicly available and accurate data on speculative, flipping and investor activity, so that policy responses can be right-sized. With this information, more strategic taxing of investor activity and multiple property owners may help to discourage speculation, but policy initiatives must be careful not to discourage productive investment activity that improves the existing stock and adds rental supply into the secondary market.”

Perrault is calling for “the urgent creation of a national table composed of federal, provincial and municipal authorities, along with real estate developers, investors and civil society organizations to comprehensively identify and tackle the obstacles to more responsible supply in all segments of the housing market. There is unfortunately no easy near-term fix, but the more urgency is attached to the problem, the sooner we will see impacts.”

In addition to removing obstacles to increase housing supply, Pasalis says, “doing nothing on the demand side now is not a bet policy makers should be making.

“As a start, our federal government’s decision to raise immigration targets today without making the corresponding supply-side housing policy changes needed to increase supply is a decision to inflate home prices out of reach of most Canadians tomorrow – including many of our newest fellow citizens. Going forward, immigration targets need to line up with bold housing policy to avoid a rapid acceleration in house prices that hurts affordability and the viability of our society as a well-functioning whole.”

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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