Canada Needs 5.8 Million New Homes by 2030 to Bring Prices Down to Affordable Levels

Canada needs to build more homes faster if the country is going to get a handle on its housing affordability crisis in the coming decade, says a new report from Canada Mortgage and Housing Corp. (CMHC). It shows the problem of undersupply is particularly acute in Ontario, where a provincial task force earlier this year recommended the province needs 1.5 million more homes by 2030.

According to CMHC, it could take as many as 1.85 million homes to bring affordability back to a level where 40% of the average household’s disposable income would pay for an average priced home.

CMHC says nationwide, Canada is tracking to build 2.3 million more homes by 2030 if construction continues at the current rate. But we need 3.5 million more than that to restore affordability to the level of the economically stable period of 2003 and 2004.

Back then, it cost the average Ontario household about 40% of its disposable income for an average priced home. Last year, that same average household needed 59% of its disposable income to shelter in a home that cost $871,000, the Ontario average.

By building the additional 3.5 million homes, it could bring the cost of the average housing unit back to between $499,000 and $551,000 — putting it within 37% to 40% of the disposable income of the average household.

“The average price is of the stock of housing so it’s not necessarily the resale price of the individual home. It represents the average house on the market. If we get more housing supply we’re hoping that supply would be more middle market, maybe more spacious apartments, maybe more housing targeted at middle-income Canadians. That new supply should be coming on at a lower price point than is currently in the market,” said CMHC deputy chief economist Aled ab Iorwerth.

The bulk of the supply gap is in the most expensive housing markets in Ontario and B.C., but Montreal also needs to boost its supply to reel in climbing prices, said the report released on June 23.

“Ensuring affordability means that housing supply will have to match growth and economic demand for housing, which may come from changes in incomes and interest rates,” said ab Iorwerth. It’s clear the scope of the problem is too great for the federal government to tackle alone, he told reporters. Other levels of government and private sector will have to be part of the solution, and innovation in redeveloping retail and industrial spaces as well as existing single-family homes into more affordable multi-family units would also play a role in boosting housing development, he said.

“Developers must become more productive and make full use of land holdings to build more housing, while governments must make regulatory systems faster and more efficient,” said the report.

But ab Iorwerth acknowledged current economic conditions aren’t conducive to hastening construction. “There are supply chain issues, there are labour shortages at the moment, the cost of financing is going up. Clearly there are short-term challenges. What we’re trying to say is, ‘This is our target for 2030 and we need everybody to work together to try to get to this target, including the private sector,’” he said. “What we’re really concentrating on is the 2030 target, not the cyclical challenges that we’re facing in the short-term.”

Increasing housing supply in both the rental and ownership market will be “critical” to achieving affordability, the CMHC report said.

Robert Hogue, a senior economist at RBC Economics, said the bank’s aggregate affordability measure surged 3.7% to 54% in the first quarter of 2022 — the worst level of affordability since the early 1990s. Hogue said the Bank of Canada’s “forceful” campaign of interest-rate hikes will further inflate ownership costs in the near term, putting RBC’s national affordability measure “on a path to worst-ever levels.” A looming price correction will, however, eventually bring “some relief to buyers,” he said, noting that property values are already slipping and are likely to fall more than 10% in the coming year.

Douglas Porter, chief economist at BMO Financial Group, said he wonders if the CMHC’s estimated housing supply shortfall will be as large a year from now, given increasing interest rates and expectations that the housing market will have “cooled even more substantially.” What’s more, he said, some skepticism should be attached to estimates of the supply shortfall, given that other tracking suggests there are scores of vacant homes in Canada. Still, Porter said focusing on the supply side remains important, even though the housing market is calming down from the “blistering” levels of the past year.

Source: Globe and Mail
Source: The Star
Source: Financial Post
Source: CMHC

Canada’s Housing Correction Has Started – What’s Surprising is Its Speed

The long-expected correction in Canada’s housing market is underway, but what is surprising observers is how quickly it’s happening. Data from the Canadian Real Estate Association showed that seasonally adjusted existing home sales fell 8.6% in May from April, down 21.7% from a year ago. For the first time since the pandemic rally began home resales on a national level dropped below levels recorded in February 2020, said RBC assistant chief economist Robert Hogue.

“What is surprising is how fast we got here,” said CREA senior economist Shaun Cathcart after the data came out. “With the now very steep expected pace of Bank of Canada rate hikes, and fixed mortgage rates getting way out in front of those, instead of playing out steadily over two years, that cooling off of sales and prices seems to have mostly played out over the last two months.”

Interest rates and psychology might explain that. Mortgage rates have gone from lows of about 1.5% to close to 5% for five-year fixed and variable rates are headed for 4%-to-4.5% by year-end, said BMO senior economist Robert Kavcic. Stress tests (the contract rate plus 200 bps) are now nearing 7%. “By late-summer, any still-favourable rate holds will be gone, and this new interest-rate reality will be fully sinking in,” he wrote.

Psychology is also at work. Early this year Canadians widely expected home prices to keep rising, (a record 64%, according to Nanos survey data) and this caused many buyers to stretch their finances for fear of missing out, said Kavcic. “But, beginning with the Bank’s first nudge in interest rates, those market expectations began crumbling.”

Now less than 44% expect higher prices this year and 23% expect lower prices, up from less than 6% early in the year. “We’ve long argued that breaking the market psychology was the key to settling conditions back down, and that deed now looks to be about done,” Kavcic said.

The big questions now are how far prices will slide and what effect, if any, it will have on the economy. RBC thinks that as the Bank of Canada continues to raise rates home prices will fall about 10% nationwide and closer to 13% in the more expensive markets of Ontario and British Columbia.

Globally, Canada has been identified as one of the more vulnerable housing markets. Capital Economics sees prices falling between 5% and 20% in Canada, New Zealand, Australia, Sweden, the U.K. and Norway, but says there is risk of steeper drops. For comparison, it sees the U.S. prices just flatlining.

Falling home prices will drag on economic growth, though the effects may not be felt until next year. Capital expects drops of 10% to 20% in residential investment as it becomes less profitable to build homes, which could knock 0.5% to 1% off GDP. Canada looks especially vulnerable to this, said Capital’s senior economic adviser Vicky Redwood.

Housing corrections won’t stop central banks from raising rates, but countries that see large price drops are more likely to see rates peak at a lower level, she said. “This is a reason why we expect the peak in interest rates to be lower in Canada than the U.S.”

Source: Financial Post

Housing is Still Unaffordable for Most Despite Declining Sales as Rising Inflation Takes Its Toll

Historically low interest rates during the past couple of years compelled many people to take on larger loans than they would have otherwise, but overleveraged borrowers might soon feel the pinch as mortgage payments increase along with interest rates. Already, one in four homeowners believe they will have to sell their homes if interest rates rise any further, according to a recent survey by Manulife Bank of Canada.

Though rising interest rates have alarmed many, the rates are certainly not alarmingly high. For example, the Bank of Canada on June 1 raised its target for the overnight rate by 50 basis points to 1.5%. It is undoubtedly a steep hike from 0.2% in early 2022, but interest rates are still below pre-pandemic levels.

Another factor affecting the housing market is inflation. The Bank of Canada’s stated target for inflation is 2%, a far cry from the 6.8% posted in April, which is beyond the comfort level of the central bank and most consumers.

As a result, the central bank is trying to wrestle inflation down. The unintended consequence will be a continuing decline in housing markets, which fall when rates climb. The conventional five-year term mortgage lending rate rose to 4.2% in April 2022, from 3.25% a year earlier.

But it’s the combination of rising interest rates and inflation that is hurting housing markets. Sales in May were down by 8.6% from April, according to the Canadian Real Estate Association (CREA). More notable, perhaps, is that the year-over-year decline in May was a record 21.7%.

Yet even though sales are down by large numbers, housing prices are showing just moderate declines. CREA’s quality- and size-adjusted Home Price Index shows that prices declined by 0.8% between April and May, but the benchmark price was still 19.6% higher than in May 2021.

While the finding that 25% of homeowners fear they might be forced to sell their homes has grabbed much attention, a related statistic has gone largely unnoticed. Manulife Bank’s survey also found that 1 in 3 Canadians did not “understand how inflation or interest rates work.” 

This is perhaps why those who fear rising interest rates might not have considered switching to a fixed-mortgage rate from a variable one to restrict increases in monthly mortgage payments. For those on variable mortgage rates and expecting interest rates to climb even further, the prudent move is to immediately switch to a fixed-mortgage rate to hedge against any further increase in mortgage payments. Fixing rates will protect many for another few years.

But much depends upon the rates when residential mortgages come up for renewal in the next few years. If interest rates are still high in the future, mortgage payments could increase for many borrowers, which could exert further downward pressure on housing sales and prices. However, if the war in Ukraine is over by then and normalcy returns to global supply chains for food and energy products, perhaps a more relaxed interest rate regime will be in place, thus sparing people from hefty mortgage payments on renewals.

A puzzle, however, still remains. What has spooked buyers more: rising interest rates or a spike in inflation? Inflation, according to a survey of 800 prospective homebuyers by Zolo, a real estate brokerage, with 57% identifying that as an impediment to their homebuying plans.

The survey also found that 71% believe they might never be able to afford a home, which makes sense given that quality- and size-adjusted prices have only slightly moderated. In Manulife Bank’s survey, 71% of those who did not own a home worried about saving up for one.

Housing prices are likely to moderate even further this year, but prices are unlikely to decline to levels where the majority would deem housing markets affordable. As a result, housing market woes are likely to continue until a significant increase in new housing construction is realized to counter the existing and future growth in housing demand.

Source: Financial Post

Newly Built Homes See Prices Similar to February Peak, Even as Sales Plummet

The head of the Toronto region homebuilders’ association is warning the re-elected provincial government must keep its commitment to increasing housing supply, even though sales of new construction homes continued to slump in May.

Home prices, however, rose across the board, particularly single-family houses, which climbed 31% year-over-year to a benchmark $1.84 million in May, according to the Building Industry and Land Development Association (BILD).

That pushed the cost of a newly built and pre-construction detached, semi-detached or townhome past April and March’s benchmark and closer to the 2022 peak of $1.86 million in February.

“Although you are seeing a short-term softening in sales, there is still a recognition that we have an overall supply challenge that is continuing to support the pricing points that have been achieved over the last 12 months,” said BILD CEO David Wilkes, who compared the current housing market to the 2017 correction in which sales slowed briefly before roaring back to life. “The numbers are telling me this is a pause and, because of the high maintenance of the price points, we need to continue to aggressively address supply,” he said.

Single-family home sales plummeted 62% year-over-year, bringing them 58% below the 10-year average. The price of new-build condos also rose 10.5% annually in May to a $1.18 million benchmark as sales of those units tumbled 31% year-over-year — 10% below the 10-year average.

Of the 2,058 new construction homes sold in May, only 491 were single-family dwellings.

But new home inventory — the number of units available for sale — rose to 10,004, up from 9,327 in April and 7,220 in March. Of May’s inventory, 8,050 units were condos and 1,954 were single-family lots.

But that still leaves supply at well below what BILD considers a healthy market, said Wilkes. “In 2013 and 2014, we had above 30,000 units in inventory. Ten thousand units is about four months’ supply. We need nine to 12 months in a healthy market to have the appropriate supply to have a balanced market,” said Wilkes.

He said he hopes the re-elected Progressive Conservative government continues in its commitment to boost Ontario’s housing supply as recommended by its own Housing Affordability Task Force in February. The task force said Ontario needs to build 1.5 million houses in the next decade. That would mean building at almost twice the current rate. Wilkes, a member of the task force, said the government has “an overwhelming mandate from the electorate to do so.

Source: The Star

Nearly Half of Canadian Renters Expect to Stay Tenants Indefinitely

Almost half of Canadians who rent say they will continue to do so indefinitely and aren’t sure when they’ll be able to get into the housing market, says a new survey. Renters surveyed by insurance firm Canada Life cited a lack of cash, fear and uncertainty as reasons for staying on the sidelines, with almost 73% saying it’s a bad time to buy a house and 17% saying they’ll never buy one.

91% of renters surveyed believe buying a home is getting harder every year, and 89% expect the next generation to have an even harder time getting into the housing market. While 79% of respondents believe homeownership is a good investment, 64% don’t think they’ll be able to buy a house unless they have financial support from others like family members. The survey, conducted between May 5 and May 11, also found that Canadians between 25 and 29 are two times more likely to continue renting indefinitely compared with those aged 30 to 49.

The housing market is showing signs of cooling, however, with home sales dropping nearly 22% in May compared with 2021, and almost 9% between April and May, according to recent data from the Canadian Real Estate Association (CREA). The countrywide average, non-seasonally adjusted price of a home was $711,000 in May, down almost 5% from April.

But that doesn’t mean renters are feeling more confident in their ability to buy a home, as out-of-control inflation and rising interest rates impact the availability of funds, said Paul Orlander, executive vice-president of individual customer at Canada Life. “These factors will likely have Canadians continuing to see homeownership as increasingly challenging,” he said in an interview.

Current homeowners are also feeling the pressure, with 24% of those surveyed saying they feel house poor. As the Bank of Canada continues to hike interest rates, homeowners could face even more pain as mortgage payments climb higher.

The central bank, which is scheduled to make its next interest rate decision on July 13, has signalled that it is open to larger hikes if needed. Meanwhile, Canada’s inflation rate skyrocketed to 7.7% in May, according to Statistics Canada.

Regardless of the decision Canadians make around homeownership, wealth building and retirement plans will be affected. While buying builds equity that could be valuable long-term, homeownership and the cost of maintaining a house can actually displace Canadians’ ability to save for retirement, Orlander said. Renting on the other hand can offer more flexibility and can preserve free cash flow for savings and investments each month that could go toward retirement, he added.

Source: The Star