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Canadian Housing Supply Targets Unrealistic

Canadian Housing Supply Targets Unrealistic

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    Canadian Housing Supply Targets Unrealistic

    Canadian policymakers are rushing to distribute money nationwide to boost home construction. However, their efforts have not succeeded, as new housing starts in January fell even further from their targets. 

    Why It Matters

    According to the Bank of Montréal (BMO), this outcome was expected as the targets were unattainable and would never be met. The lack of resources available to build at that scale and the fact that homebuilders build for the market, not policymakers, are partially to blame. 

    Even though there has been a decrease in the start of new homes, builders are still working rapidly. Housing starts in Canada decreased by 10% from December 2023 to January 2024, with a total (seasonally adjusted annual rate) SAAR of 223,589 units across all areas, according to CMHC. A trend that began in losing momentum in early 2022. Nevertheless, these levels are strong and are much higher than any numbers seen in 20 years.

    What Experts Are Saying

    “This is still a robust level of building activity for Canada, especially considering some of the shocks that have been thrown at the market and homebuilders,” says Robert Kavcic, senior economist at BMO. “That said, it’s also still miles below the supply targets that policymakers have dreamed up—we maintain that those will never be hit.”

    The housing targets set by policymakers are unrealistic and not rooted in reality. Even if they continue to promote these targets, the reality of the market conditions and the industry’s capacity makes it unlikely they will meet them. This statement has been repeated numerous times by Kavcic, even during cross-country tours to the public. Kavcic also stated that Canada’s immigration plan is not feasible in any version of reality.

    Canada could need upwards of 3.5 million new homes built by the end of the decade, according to Aled ab Iorwerth, deputy chief economist with CMHC. According to a recent report by CIBC, we’ll need more than 5 million homes built by the end of the decade to meet targets.

    Reading Between the Lines

    According to Kavcic, builders will adapt to market circumstances. They were already operating at maximum capacity between 2021 and 2022 but have now reduced their efforts due to lower demand for investments (presales) and increased borrowing expenses.

    The decline in new housing starts occurred around the time of Ottawa’s 2022 budget, which was full of stimulus measures to encourage more supply. However, builders responded to market conditions and have pulled back, given less investment demand and higher borrowing costs.

    In reality, there has been a significant decline in job openings for construction and speculation that the expenses associated with building are also starting to decrease. According to Kavcic, the bank has presented a significant amount of data that contradicts the narrative surrounding the housing market. He claims that the housing supply could keep up with demand until recently, when demand was purposely exceeded due to the recent surge in Canada’s population. A fact later confirmed in detail by Stats Canada.

    How Lack of Supply Affects Homebuyers and Homeowners

    Over the short term, homebuyers may suffer from the lack of home supply as prices continue to rise – increasing their costs to enter the housing market. With wages increasing faster than supply, it could continue challenging homebuyers’ affordability. Over the long term, the exodus out of cities could continue for prospective homebuyers challenged by home prices. Homeowners living in the more densely populated areas surrounding Canada’s cities could continue seeing their property values increase in the short term. However, over the longer term, Canadians’ ability to afford to live in cities could mean higher home costs. A lack of home supply is a problem that affects all Canadians – even those who are supporting NIMBYism across the nation.

    As supply concerns won’t abate anytime soon, there is some urgency for prospective homebuyers, especially with the lower reading for Canada’s CPI this week. With expectations of higher housing costs, it’s only good planning for those looking to purchase a home to get into homeownership sooner so they can start building equity. If you’re a mortgage holder, lock in a great fixed rate for your upcoming renewal.

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