Unveiling Canada's Housing Market Challenges:
Overcoming the demand-supply gap is a balancing act
March 8 , 2024
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
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Canada's housing market is standing at a critical juncture, grappling with a persistent mismatch between housing demand and supply. While CMHC estimates the supply gap to reach 3.5 million homes by 2030 , CIBC projects an even larger shortfall of 5 million. This implies a growth of ~20% over the supply estimate of 2.9 million units at the current pace of housing starts. The majority of Canada's housing supply gaps are concentrated in Ontario and British Columbia, driven by their current population densities. Quebec and Alberta are also anticipated to require increased supply due to projected population and economic expansion.
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Figure 1.0
Source: CMHC[1]
The primary catalyst behind this demand surge has been a sharp increase in population growth rates post-pandemic, at nearly double the pre-pandemic growth rate due to accelerated influx of immigrants. Coupled with historically low interest rates, this surge has fueled a demand frenzy, leading to a sharp escalation in prices as supply failed to keep pace.
Figure 2.0
Source: Statistics Canada, Table: 17-10-0009-01, Release date: 2023-12-19
Figure 3.0
However, the price surge was not primarily fueled by end-use purchasing, as the population growth was predominantly driven by immigrants, particularly non-permanent residents, intensifying the demand for rental accommodations and sparking speculative buying from investors, crowding out the end user segment who was already constrained by affordability. Last year, rent prices in Canada surged as supply grappled to match demand, leading to the lowest national vacancy rates on record since the Canada Mortgage and Housing Corp. began tracking that data in 1988. Notably, Calgary and Edmonton experienced their lowest vacancy rates in a decade, at 1.4 per cent and 2.4 per cent, respectively, along with the sharpest rise in rents among major cities in 2023. According to a report released by Bank of Canada, investors have become more prevalent in Canada’s housing market, accounting for 30 per cent of all residential real estate purchases in the first half of 2023 while the percentage of first-time homebuyers dwindled from 52% in the first quarter of 2015 to 43% in the same period in 2023.
Figure 4.0
Source: Rentals.ca, National Rent Report
Figure 5.0
Source: Bank of Canada
Figure 6.0
Source: Bank of Canada, Indicators of financial vulnerabilities
The challenge of meeting the supply gap is further compounded by a declining trend in housing starts. 2024 began sluggishly, with the standalone monthly seasonally adjusted annual rates (SAAR) of total housing starts in Canada dropping by 10% from December 2023 to January 2024.
Figure 7.0
Despite soaring demand, supply has failed to keep pace due to significant delays and prolonged development timelines, initially stemming from rising input costs and labour shortages, and later exacerbated by funding constraints amidst higher interest rates. Slow policy responses to evolving market dynamics have further hindered progress. Moreover, the higher proportion of Multi-Unit Residential Buildings (MURBs) in development, which typically entail longer construction periods, contributed to delays in bringing units to market.
Figure 8.0
*Average across all dwelling types, including single-detached, semi-detached and row homes, as well as apartments
Source: CMHC, Housing Supply Report, October 2023, Table 2
Source: CMHC, Housing Supply Report, October 2023, Table 2
According to Statistics Canada’s Residential Building Construction Price Index (RBCPI), construction costs for residential buildings in the 11-census metropolitan area (CMA) composite rose 6% in the third quarter of 2023. Earlier peaks reflect a period of rapid escalation in construction costs in 2020 and 2022. In those years, all major centers saw an escalation in the material, labour and equipment costs of new home construction.
Figure 9.0
Source: Statistics Canada, Table: 18-10-0276-02, Release date: 2024-02-01
Although growth in construction costs has moderated across major centers in recent quarters, funding constraints have intensified amid a rising interest rate environment, particularly affecting rental apartments as rental developers generally cannot raise capital through preconstruction sales. These dwellings, which had garnered significant interest from developers in 2021 and 2022 due to low vacancy rates and rent increases in several urban centers, now face delays, further exacerbating housing affordability challenges for potential buyers and tenants.
These factors have culminated in an affordability crisis, with RBC's paper indicating a significant decline in the proportion of households able to afford homes, at least a regular condominium apartment, plummeting from 60% in 2019 to 45% in 2023[2] . An even smaller 26% could now afford a (relatively more expensive) single-family home.
The repercussions of unaffordability include considerable stress on individuals and families with deteriorating mental and physical health due to financial strain and housing insecurity, limiting an individuals' ability to engage socially and participate in community activities particularly impacting low-income earners and single parents.
The housing crisis is compounded by unaccommodating policy and regulatory frameworks. While some efforts have been made to mitigate these issues, such as the introduction of rent controls and funding for affordable housing projects, these measures have often fallen short of keeping pace with the growing demand and intricacies of the market. Additionally, outdated zoning laws and development restrictions have at times hindered the expansion of affordable housing options.
The high costs of housing severely limit residents' ability to engage in community life, invest in education or health, and contribute to local economies. This unaffordability strain also fuels increased social and economic segregation, as individuals with lower incomes are pushed to the outskirts of cities, away from essential services and opportunities.
A study by The Canadian Centre for Economic Analysis (CANCEA) on housing unaffordability in the Greater Toronto Area (GTA) in 2023 revealed significant insights. Individuals spending less than 30% of their before-tax income on housing had an expected well-being score of 7.48 out of 10. In contrast, those spending between 30% and 50% of their income saw a 7% decline in their expected well-being score to 6.97. Notably, individuals spending more than 50% of their before-tax income on housing experienced an even more pronounced decline in well-being, with an expected score of 6.79, reflecting a 9.2% decrease compared to those with more affordable housing. The report estimated the total negative social value for GTA residents living unaffordably at $37 billion in 2023, representing approximately 7.7% of the GTA's annual GDP, over 4.5% of Ontario's annual GDP, and 20% of Ontario government revenues.
Fixing the housing crisis is not just a matter of real estate economics; it represents a fundamental challenge to the well-being and sustainability of communities. It requires a multi-faceted approach encompassing economic, social, and policy dimensions.
Merely increasing supply is not a panacea and is also not practically achievable, given the logistical and financial hurdles involved. Considering the anticipated shortfall, a supply surge of at least 20% would be necessary, a feat challenging to attain due to the timeframes from project inception to completion and constraints related to costs, funding, and labour scarcity. Furthermore, since the supply did not escalate swiftly in response to a heated market, it is improbable to do so amidst the challenges of declining demand in the mass segment due to unaffordability, a freeze in purchases of single and higher-priced dwellings as buyers await changes in the interest rate cycle.
Likewise, while eagerly anticipated interest rate cuts may temporarily alleviate affordability concerns, they are not a sustainable solution as prices would inevitably rise in tandem with the heightened demand, given the delay in augmenting supply.
Below are some measures that provide promising solutions, but a focused implementation strategy and a collaborative approach will be needed.
Managing Population Growth: Reassessing immigration policies is crucial to control population growth until the capacity aligns with both current and anticipated demand. Additionally, conducting a deeper analysis of the skill mix of incoming populations is imperative to address labour shortages in key sectors and skill categories despite the recent unprecedented influx.
The recent imposition of caps on student visas at 360,000 for 2024 is a positive step to alleviate the demand for rental housing and mitigate unscrupulous activities masquerading as education, which could tarnish Canada’s reputation as an educational destination. Although this may not have an immediate impact on rental demand, as the difference compared to last year is not significant, continuing the cap beyond 2025 could relieve pressure on rental demand as student outflows exceed inflows. Coupled with measures mandating Designated Learning Institutions (DLIs) to provide student accommodation, this could alleviate rental housing demand, freeing up capacity for the wider public.
Rein in the Investor Activity: While investors play a crucial role in market development and price discovery, limiting investor activity is essential to curb speculation and prevent distortions in prices that could adversely affect the end-user segment. Excessive investor activity also exposes real estate markets to bubbles, as witnessed in past global crises. Recent measures announced by British Columbia, such as a 20% tax on home flipping and removing tax deductions for expenses related to properties used for short-term rental income, aim to reduce investor activity in the market. However, the contraction in investor activity needs to be managed in a measured manner ensuring that it does not lead to a sharp fall in transaction volume and a deflation in prices.
Taxation and Subsidies: In addition to the above measures, providing additional tax deductions and interest rate subsidies for first-time home buyers in the affordable segment can make housing accessible to lower-income groups and incentivize developers to cater to this segment. Similarly, imposing higher interest rates on second/third mortgages can discourage speculative investor buying. Government funding support to expedite completion of projects stuck due to funding constraints, as well as targeted funding for high-density dwelling projects, can also help alleviate the housing crisis.
Zoning Regulations: While revising zoning regulations can make scarce land available for development, especially in urban centers, it requires careful consideration due to the larger impact on communities and social infrastructure. The Federal government’s $4-billion Housing Accelerator Fund, launched last year, has encouraged cities to regulate zoning changes. However, zoning changes must be accompanied by infrastructure upgrades and thorough planning, with community involvement, awareness and education as well as developer participation, to ensure effective implementation.
Innovation in Construction Technology: While zoning is only one piece of the puzzle to reduce overall costs, keeping construction costs low and addressing labor shortages are equally crucial. Technologies such as prefabricated structures, Building Information Management (BIM) systems, drones, and cloud technologies can reduce costs and address labour shortages. Leveraging tools like BIM and advanced cloud technologies, PEG completed a 25-story apartment building and a six-story apartment building in significantly shorter timeframes compared to traditional construction methods. A survey of 275 companies by KPMG Canada[3] found that while Canadian property developers are keen on new digital construction technology, known as con-tech, many are not making it an investment priority despite 73 per cent of firms it surveyed acknowledging that the Canadian construction industry lags behind other countries in adopting con-tech.
While many of these measures are long-term and may not yield immediate results, they are essential structural changes needed to ensure sustained economic success and social well-being for all Canadians.
These factors have culminated in an affordability crisis, with RBC's paper indicating a significant decline in the proportion of households able to afford homes, at least a regular condominium apartment, plummeting from 60% in 2019 to 45% in 2023[2] . An even smaller 26% could now afford a (relatively more expensive) single-family home.
The repercussions of unaffordability include considerable stress on individuals and families with deteriorating mental and physical health due to financial strain and housing insecurity, limiting an individuals' ability to engage socially and participate in community activities particularly impacting low-income earners and single parents.
The housing crisis is compounded by unaccommodating policy and regulatory frameworks. While some efforts have been made to mitigate these issues, such as the introduction of rent controls and funding for affordable housing projects, these measures have often fallen short of keeping pace with the growing demand and intricacies of the market. Additionally, outdated zoning laws and development restrictions have at times hindered the expansion of affordable housing options.
The high costs of housing severely limit residents' ability to engage in community life, invest in education or health, and contribute to local economies. This unaffordability strain also fuels increased social and economic segregation, as individuals with lower incomes are pushed to the outskirts of cities, away from essential services and opportunities.
A study by The Canadian Centre for Economic Analysis (CANCEA) on housing unaffordability in the Greater Toronto Area (GTA) in 2023 revealed significant insights. Individuals spending less than 30% of their before-tax income on housing had an expected well-being score of 7.48 out of 10. In contrast, those spending between 30% and 50% of their income saw a 7% decline in their expected well-being score to 6.97. Notably, individuals spending more than 50% of their before-tax income on housing experienced an even more pronounced decline in well-being, with an expected score of 6.79, reflecting a 9.2% decrease compared to those with more affordable housing. The report estimated the total negative social value for GTA residents living unaffordably at $37 billion in 2023, representing approximately 7.7% of the GTA's annual GDP, over 4.5% of Ontario's annual GDP, and 20% of Ontario government revenues.
Fixing the housing crisis is not just a matter of real estate economics; it represents a fundamental challenge to the well-being and sustainability of communities. It requires a multi-faceted approach encompassing economic, social, and policy dimensions.
Merely increasing supply is not a panacea and is also not practically achievable, given the logistical and financial hurdles involved. Considering the anticipated shortfall, a supply surge of at least 20% would be necessary, a feat challenging to attain due to the timeframes from project inception to completion and constraints related to costs, funding, and labour scarcity. Furthermore, since the supply did not escalate swiftly in response to a heated market, it is improbable to do so amidst the challenges of declining demand in the mass segment due to unaffordability, a freeze in purchases of single and higher-priced dwellings as buyers await changes in the interest rate cycle.
Likewise, while eagerly anticipated interest rate cuts may temporarily alleviate affordability concerns, they are not a sustainable solution as prices would inevitably rise in tandem with the heightened demand, given the delay in augmenting supply.
Below are some measures that provide promising solutions, but a focused implementation strategy and a collaborative approach will be needed.
Managing Population Growth: Reassessing immigration policies is crucial to control population growth until the capacity aligns with both current and anticipated demand. Additionally, conducting a deeper analysis of the skill mix of incoming populations is imperative to address labour shortages in key sectors and skill categories despite the recent unprecedented influx.
The recent imposition of caps on student visas at 360,000 for 2024 is a positive step to alleviate the demand for rental housing and mitigate unscrupulous activities masquerading as education, which could tarnish Canada’s reputation as an educational destination. Although this may not have an immediate impact on rental demand, as the difference compared to last year is not significant, continuing the cap beyond 2025 could relieve pressure on rental demand as student outflows exceed inflows. Coupled with measures mandating Designated Learning Institutions (DLIs) to provide student accommodation, this could alleviate rental housing demand, freeing up capacity for the wider public.
Rein in the Investor Activity: While investors play a crucial role in market development and price discovery, limiting investor activity is essential to curb speculation and prevent distortions in prices that could adversely affect the end-user segment. Excessive investor activity also exposes real estate markets to bubbles, as witnessed in past global crises. Recent measures announced by British Columbia, such as a 20% tax on home flipping and removing tax deductions for expenses related to properties used for short-term rental income, aim to reduce investor activity in the market. However, the contraction in investor activity needs to be managed in a measured manner ensuring that it does not lead to a sharp fall in transaction volume and a deflation in prices.
Taxation and Subsidies: In addition to the above measures, providing additional tax deductions and interest rate subsidies for first-time home buyers in the affordable segment can make housing accessible to lower-income groups and incentivize developers to cater to this segment. Similarly, imposing higher interest rates on second/third mortgages can discourage speculative investor buying. Government funding support to expedite completion of projects stuck due to funding constraints, as well as targeted funding for high-density dwelling projects, can also help alleviate the housing crisis.
Zoning Regulations: While revising zoning regulations can make scarce land available for development, especially in urban centers, it requires careful consideration due to the larger impact on communities and social infrastructure. The Federal government’s $4-billion Housing Accelerator Fund, launched last year, has encouraged cities to regulate zoning changes. However, zoning changes must be accompanied by infrastructure upgrades and thorough planning, with community involvement, awareness and education as well as developer participation, to ensure effective implementation.
Innovation in Construction Technology: While zoning is only one piece of the puzzle to reduce overall costs, keeping construction costs low and addressing labor shortages are equally crucial. Technologies such as prefabricated structures, Building Information Management (BIM) systems, drones, and cloud technologies can reduce costs and address labour shortages. Leveraging tools like BIM and advanced cloud technologies, PEG completed a 25-story apartment building and a six-story apartment building in significantly shorter timeframes compared to traditional construction methods. A survey of 275 companies by KPMG Canada[3] found that while Canadian property developers are keen on new digital construction technology, known as con-tech, many are not making it an investment priority despite 73 per cent of firms it surveyed acknowledging that the Canadian construction industry lags behind other countries in adopting con-tech.
While many of these measures are long-term and may not yield immediate results, they are essential structural changes needed to ensure sustained economic success and social well-being for all Canadians.
[1] CMHC: Housing shortages in Canada Updating how much housing we need by 2030
[2] https://thoughtleadership.rbc.com/high-rates-and-prices-make-it-less-affordable-to-own-a-home-in-canada/
[3] Cue construction 4.0: Make-or-break time
[2] https://thoughtleadership.rbc.com/high-rates-and-prices-make-it-less-affordable-to-own-a-home-in-canada/
[3] Cue construction 4.0: Make-or-break time
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]