Much has been made about low interest rates being solely responsible for rapidly rising home prices, but that’s not quite the case, says Scotiabank.
“The current situation in Canadian housing markets primarily reflects a chronic insufficiency of home supply that is temporarily exacerbated by pandemic-related impacts linked to record-low mortgage rates and a shift in preferences for housing by type and geography,” said the bank’s report, written by Jean-François Perrault. “Past and future macroprudential measures are ineffective band-aids that do not address the underlying insufficiency of supply.”
Canada has the lowest number of housing units per 1,000 people of all G7 nations, and according to Perrault’s report, that number has been in decline for five years because of the country’s booming population.
“An extra 100,000 dwellings would have been required to keep the ratio of housing units to population stable since 2016—leaving us well below the G7 average.”
According to Dustan Woodhouse, president of Mortgage Architects, in addition to undersupply, other factors are contributing to increased housing costs.
“How do you fix supply? That’s a really difficult question because of the amount of time it takes and the cost inputs. Labour is going up because of a labour shortage; raw materials are going up because of a shortage of material, so it’s not an easy situation to sort out—not by a long shot,” he said. “The bottom line is what’s driving the housing market is what’s been inconvenient of the government to acknowledge for years now, and that is the lack of supply.”
As the Scotia report noted, the COVID-19 pandemic intensified the rush for housing, namely by serving as a catalyst for people to reconsider the (in)sufficiency of space in the homes in which they lived. However, the pandemic also may have helped avert an even worse supply crunch.
“The reduction of immigration growth observed in 2020 withheld the further increase in demand that would have otherwise occurred,” said Perrault’s report. “So 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.”
Demand is slated to surge even more—population growth will resume its torrid pace once the government realizes its immigration plan, while its planned national childcare system will bolster Canadian families’ incomes. These two things alone will drive housing demand even higher than it is right now.
“We need a truly collaborative, multi-stakeholder process to break through these political challenges to concretely identify the factors limiting the supply response of all forms of housing: owned, rental, affordable, singe-family, and multi-family… We propose that the federal government convene a national table bringing together federal, provincial, and municipal authorities along with builders, developers and civil society organizations to document the multiple challenges to raising supply and identify solutions to these obstacles. Given the lags inherent in the development process and the urgency of the supply challenge, this table should be convened expeditiously and report on potential solutions within the next six months with commitments by all parties to immediately act upon those.”