A seaplane flies past condo towers in downtown Vancouver, on April 25, 2023.DARRYL DYCK/The Canadian Press
Corey Hawtin is founder and chief executive officer of Core Development Group.
The Canadian residential real estate market is like a ship sailing at full steam in the clear light of day, with the crew’s eyes wide open, into an iceberg.
I am not referencing a housing crash. Nor am I referencing current acute economic conditions of higher interest rates, which have depressed real estate demand and resulted in lower prices, eroding billions of dollars of value.
Rather, this is about the long-term trajectory of affordability in our housing market, which is on a dangerous upward spiral. It’s a trajectory that higher interest rates have not changed.
The challenges of this market form a well-established litany at this point, yet still, there seems to be little appreciation of their magnitude or the consequences of failing to address these issues.
Benchmark Canada against its Group of Seven partners and you will soon see how dire the situation is: We have the fewest homes per capita but the highest home ownership rate; the lowest affordability; the highest population growth; the lowest production of new housing, and the highest cost to build. At the same time, the development industry is hobbled by some of the heaviest regulation and taxation among G7 countries.
Should we be unable to address our challenges, affordability will most certainly get worse and at some point it will not be palatable for Canadians who are already stretched. Similar to what we have seen elsewhere in the world, we could see real impacts on GDP growth, economic production and a mass migration away from cities that are simply no longer affordable to live in.
Although there have been positive moves with some tax credits recently announced, the extreme shortage of supply is a major factor driving Consumer Price Index inflation and affordability woes, challenging renters and purchasers alike for the foreseeable future. Higher interest rates are simply making our housing issue worse as they suppress new supply, and put further pressure on affordability.
Estimates of the number of additional new homes needed to restore affordability by 2030 range between 3.5 and 5.5 million new units. We would need to build an additional 600,000 to 1 million homes each year until 2031 to achieve that goal. Over the past 10 years, the average number of homes built in Canada is around 200,000 per year. To close the 3.5 million home gap by 2030, we would need, at a minimum, to triple our capacity to build.
Governments can, and likely will, do more to stimulate home building. But let’s imagine that the levers available to them – substantially cutting one of the longest zoning and permitting timelines in the world, and reducing the taxes and costs associated with current policy – could cut the cost of a new build by 30 per cent.
That would be certainly welcomed, but it would not be enough. Policy changes take time to influence supply. Infrastructure needs to be built to support it, capital needs to be available to fund it, and the industry must have the capacity to build it.
Currently, tradespeople are retiring at a ratio of 2 to 1, with one less-experienced person joining the work force for every two who are leaving it.
We would also need far more capital – an estimated $2-trillion to $3-trillion more invested into new housing than is currently in the system. With the risks associated to new development, and current capital allocation close to maximum capacity, where is the money coming from?
As Canadians stretch past the 30-per-cent rule on income to housing costs, and affordability compared to our G7 peers continues to erode, we are slowly becoming aware of how urgent the need is. But how can we create the conditions necessary to stimulate such rapid growth of our housing stock?
There are four factors that are slowing efforts down: regulation, tax, capital, and capacity. Some welcome changes have already been made regarding taxes. More are needed. New and improved policies that accelerate approval timelines and reduce burdensome regulations on all types of developers are also needed. Doing so will generate confidence in the capital markets which, in turn, will make new allocations in the sector with the expectation that they will produce proper risk adjusted returns. Further, capital from around the world is eager to invest in Canada; restrictions need to be lifted to promote more investment in supply not less.
Capacity may be the most challenging issue of these four. Innovation in the prefabricated and modular housing industries will help address this issue over the mid to long term, but right now we need a lot of tradespeople. Less than 1 per cent of new residents admitted into Canada enter under the Federal Skilled Trades Program. We do need immigration to solve our housing crisis, but we must adjust it in such a way that it better meets our work force requirements.
The iceberg can be narrowly avoided, but it’s really a change of direction that is urgently needed. Failing to address our housing crisis could be catastrophic to all Canadians and all businesses. Having an affordable housing market is a key staple of any functioning economy. We have narrowly sailed by so far but can’t continue our current direction without rapid change.