Thoughts

July 19, 2024 | 12:45

Canadian Housing: Build, Baby, Build?

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Policymakers pining to pad Canada’s housing stock might be careful what they wish for. The latest data on construction confirm two things: developers are mostly tapped out and what they are building many families don’t want.

Housing starts dipped in June but stayed close to the 250,000 annualized mean of the past two years. That’s down moderately from cycle highs but well above the 200,000 average of the past three decades. Starts remain elevated due to torrid population growth, with an assist from new policies to reduce development charges and speed-up construction. Adjusted for population size, starts are tracking long-run norms. But completions would need to double to keep up with adult population growth, which topped one million in 2023, triple the half-century mean. That’s not going to happen with builders hamstrung by high borrowing costs, zoning restrictions and skilled-labour shortages. The more practical solution is to curb immigration, which is what the federal government (belatedly) plans to do by cutting the number of temporary residents from almost 7% of the population to 5% in the next three years. This should slow annual population growth from 3% to 1%, a pace builders can readily meet.

Residential investment spending has seesawed in the first five months of the year, though mostly in a downward direction with volumes now hovering below pre-pandemic levels. The country is still building about the same number of units as last year, but more attached ones. Real investment in multifamily units is up 5% annualized this year, while that for single-detached homes is down 10%. In the second quarter, a record four-in-five housing starts were multi-units versus less than half two decades ago (Chart 1). With limited space to build detached homes in the largest cities, notably Vancouver and Toronto, and many families priced out of the market, multiples are the more viable option for builders and buyers.

Another problem, at least in Greater Toronto, is that many condos that investors can’t afford to close on, or hang onto, are flooding the market and many are too small for families to live in. Urbanation reports that sales of new condo units plunged to 27-year lows in the first half of the year, while unsold units swelled to three times the norm. Prices may need to fall further to bridge the chasm between supply and demand. But high construction and financing costs have dissuaded builders from cutting prices to help clear the market. The rising condo inventory (including record levels in the resale market) could put the brakes on multiple-unit construction in the Toronto region for some time, with starts already plumbing two-decade lows. That won’t add to the housing stock.

Bottom Line: A combination of slower population growth, lower interest rates, lower home prices in some pockets, and rising incomes will eventually restore some semblance of normalcy for affordability. More construction of “middle” housing would help, too. Just don’t expect builders to pull a rabbit out of the hat.