Canadian Home Prices, Once Cheered, Are Now Dragging on Economic Growth

Canadians have long been proud of having a resilient housing market. After the global financial crisis, the Canadian market experienced a modest correction and then shrugged it off. This was viewed positively politically as home prices were a very public barometer of how a country was doing, and that measurement approach became cemented in the minds of a generation. As home prices climbed higher it also became a source of wealth for many. With approximately two-thirds of Canadians owning a home, according to Statistics Canada, that provides a popular majority of people that like to see homes increasing in value.

Until recently, those struggling with a very real cost-of-living crisis in Canada were not viewed as a louder camp, with significant housing affordability policies only being added in recent years. Homeownership being unattainable for many should not make any Canadian proud. The worst part is that Canadian home prices are at the point where they also constrain general economic growth, making upwards mobility even more difficult. This makes the urgency to solve the high cost of housing more pressing. The Organization for Economic Co-operation and Development (OECD) predicts that Canada will be the worst-performing advanced economy over the next decade. Let’s look at the different ways extreme home prices are constraining growth and innovation.

There are lots of innovators working hard in Canada, but the bottom line is that the country does not rank in the top 10 in the Global Innovation Index and the Conference Board has the country in the bottom half of its peers. High home prices make entrepreneurship, and taking risks in general, very difficult. When home prices are high, people are less likely to move to new areas for job opportunities, reducing growth. High mortgage rates also mean owners are less willing to sell and there are fewer options in the markets for people looking to move. This is currently happening in Canada, with very few homes for sale. This means that people cannot relocate to take advantage of better job opportunities, even if it would mean a higher salary. If paying your mortgage is your primary concern, you are also unlikely to take risks by joining or starting a new business.

High home prices, and mortgage service levels, also result in reduced consumer spending and investment. High home prices lead to increased debt, as people take out larger mortgages to afford homes, making it more difficult for individuals to save money, invest in businesses, or otherwise contribute to economic growth. In the a recent Angus Reid survey, more than half of Canadians said they couldn’t keep up with the cost of living.

Canadians devote more income to servicing debt than other major peers. This should come as no surprise when factoring in Canada’s high tax rates and record debt burdens. The question is where does the government expect investment in new business to come from as dollars go to servicing the existing debt burden, which is there because Canadians need a place to live. It’s difficult to blame people for wanting a backyard for their kids.

Over the past decade, Canadians were largely cautious about purchasing homes. The only time Canadians were given the all-clear to buy homes was just recently when Bank of Canada governor Tiff Macklem assured Canadian households and businesses that borrowing rates will remain at historic lows. The exact quote was as follows: “Our message to Canadians is that interest rates are very low and they’re going to be there for a long time.” This ironically preceded one of the fastest increases in rates on record and those that followed this advice now have much higher debt servicing costs. It’s tough to blame Macklem, as Canada must keep up with U.S. rate increases to avoid importing inflation. This was an impossible position for the Bank of Canada. But it’s hard to blame the average Canadian who thought they finally had the all-clear to purchase a home. Now they must try to manage the results of that decision.

Those Canadians are now servicing a debt level that makes no sense and is only increasing, as the amortization terms of mortgages are being extended by many banks. This is an issue for another larger article, unfortunately, but it will compound the problems above. These individuals do not have the time, capital, or risk appetite to innovate to the extent we see in other countries. There is a very real risk that Canada continues to stagnate, with home values, previously celebrated, being a key cause.

Source: Financial Post

‘Still on the Sidelines’: Sales of New GTA Homes and Condos Continue to Slide

Sales of new GTA homes and condos continued to fall year-over-year in March, according to new numbers released by the Building Industry and Land Development Association (BILD).

“People are still on the sidelines,” said David Wilkes, the CEO of BILD, as buyers remain cautious in the new, higher interest rate, uncertain economic climate. “In March, the pause that we had been seeing in new home sales continued, sales were down significantly from a year ago, inventory has remained tight,” Wilkes added.

There were just 384 sales of new single-family homes in the region, down a whopping 57% from March 2022, and 893 new condo sales, down 73%.

Altus Group, BILD’s source for market analysis, also found in the new report that the total new home inventory in March was 14,479 units, down slightly from February, but up from 2022’s all-time low in March. This includes 12,887 condos and 1,592 single-family units, or about 10 months and six months of inventory, respectively.

Inventory fell during the low interest rate, high demand period, and takes times to build back up, according to BILD. A balanced market has about 9 to 12 months of inventory.

Prices, meanwhile, seem to be flatlining after a drop. The seasonally adjusted benchmark price for both new single family homes, including detached, linked, and semi-detached houses and townhouses, increased slightly from February to about $1.8 million, down 2.1% year-over-year.

The benchmark price for new condos also increased a bit from February, to about $1.12 million, down 10.8% year-over-year. These small price increases have at least partially been attributed by realtors and builders to the ongoing lack of supply. With so few homes on the market, there is sometimes stiff competition for the ones that are available.

The Bank of Canada’s eight interest rate hikes in a row after historic lows, “did dampen demand,” Wilkes said. But he’s concerned about what will happen when the market adjusts and that demand comes back. The Bank hit pause at its last two announcements, holding the overnight rate at 4.5%. “The reason that prices have gone down (annually) is not a structural fix to supply and demand, but a temporary decrease in demand that has resulted in prices going down,” Wilkes said.

Demand will be back due to population growth, argued Wilkes. “The market will continue to be out of balance, which is why we’re so focused on making sure we make the necessary changes to deliver more supply to the market.”

Toronto’s chief planner released a long-awaited report calling for huge changes to Toronto’s zoning laws, legalizing multiplexes in every neighbourhood. The current rules only allow single-family homes in a large swaths of the city. It’s measures like this that are needed, Wilkes said.

“We are so well below what we need to be delivering,” he added. “This market is far from fixed.”

Source: The Star

Vancouver Housing Report Shows New Construction Stuck Because of Skyrocketing Costs

Vancouver is hitting record numbers of approvals and completions of purpose-built rental apartments, social housing and supportive housing built, all at levels beyond what is being constructed in the rest of the region.

But the city, which accounts for 25% of Metro Vancouver’s population, is far from meeting the 10-year target it set in 2017 for 72,000 more homes, say city staff in the latest annual report on housing. Some rental projects, already approved, have stalled in the past couple of years because of the rising costs of construction.

“Vancouver is a leader in the region in total construction and especially in rental,” said Edna Cho, a housing policy planner who presented the report to council members Wednesday. “Although we’ve enabled significant supply, we’re seeing lots of challenges.”

But staff say they now need to make some changes to ensure that homes that are getting city approvals, a process that takes a lot of time and money, actually get built. “It hasn’t been this way in the past but, looking at this data, moving from approval to completion will be a focus,” said the city’s director of planning, Theresa O’Donnell.

That means allocating staff time for applications to projects that are the most likely to get started early, lobbying to get extra financing for social-housing buildings that have stalled because of financial problems, and making some adjustments to the city’s requirements from developers who have below-market units in their rental buildings.

The city approved 11,000 units of housing last year, its highest level historically – about 3,000 more units than the yearly average of the past decade. That included 1,330 social- and supportive-housing apartments, 4,260 private-market rentals, 4,400 condos, and 435 laneway houses.

But a third of all housing approved since 2017 hasn’t been constructed. Around 43,000 homes have been approved; only 28,000 have been built. Although Vancouver has approved thousands of rentals in the past several years, only 1,359 were built last year: private ones and 383 in social- or supportive-housing projects.

Among the approved but unbuilt homes are 2,500 to 3,000 social-housing apartments. At least 1,100 of those are being held up because they don’t have enough money to cover the rising cost of construction, said Dan Garrison, the city’s director of housing policy.

At the same time that housing staff are trying to get more social- and supportive-housing built, they’re also saying that Vancouver is carrying a wildly disproportionate share of the load in the region.

That’s something several city councillors were also concerned about as they looked at the numbers. According to Metro Vancouver data, Vancouver now has 7,191 supportive-housing apartments – much more than the rest of the region combined. Surrey has the next highest amount, with 790 units. Maple Ridge has 192; New Westminster, 189; Langley, 164; and Burnaby, 123. The rest of the 22 municipalities in the region have numbers in only the double digits, except for a few that have nothing, including Delta, West Vancouver, White Rock, and Pitt Meadows.

Councillor Rebecca Bligh wanted to know what B.C. government is doing, as part of its province-wide housing plan, to make sure that other communities are doing their part.

While staff said there are continuous discussions with the province about that, city manager Paul Mochrie sounded a strong warning note. “The province has recognized this, but we have not seen significant change,” he said. “I do think there is a lack of a regional approach and this continues to be a challenge for Vancouver. We can’t meet the demand.”

Source: Globe and Mail

CMHC Forecasts 32% Drop in New Home Construction Due to Inflation, Labour Shortages

Canada’s housing agency predicts that home building could plunge 32% in 2023, calling it an “alarming” situation given the dearth of affordable places to live in the country.

The rising cost of building materials, a shortage of construction workers and higher interest rates mean housing starts could drop 19% year-over-year under the current conditions, Canada Mortgage and Housing Corp. said in its annual housing market outlook. But if inflation persists and interest rates remain high for longer than expected, housing starts could drop as much as 32% to 176,890 units, the agency said.

Residential building costs are up almost 20% over the past year, according to Statistics Canada.

CMHC chief economist Bob Dugan called the decline “alarming” and said the climate is “inhospitable” for new construction. He said a “call to arms” is needed to boost home building and warned that affordability will continue to worsen if the country’s housing stock does not increase.

“We need a much higher level of starts if we want affordability to improve,” Mr. Dugan said on a call with reporters to discuss the outlook. He said housing starts have to double from 2021′s record level, when ground was broken on 271,198 new units.

But real estate experts have said it will be difficult to boost home building given the multitude of other infrastructure projects sucking up experienced tradespeople. And with the spectre of higher interest rates still present, builders are wary of breaking ground on rental apartment buildings because the profit margins are so thin.

“In principle, we would not start a purpose-built rental apartment project with a backdrop of interest rates in an upward trajectory and until inflation is steadied,” said Clemens Sels, the president of Colonia Treuhand Ltd. Group, which has been developing real estate in Southern Ontario for 50 years.

In the meantime, competition for housing will continue to increase as the federal government boosts immigration targets to a record 1.45 million new permanent residents over the next three years. That has kept home prices from falling further after the Bank of Canada hiked interest rates to slow inflation.

The national average home price was $686,371 in March. That’s 14% below March 2022 but almost $75,000, or 12%, higher than January 2023, according to the latest data from the Canadian Real Estate Association.

CMHC expects the average price for the year to be about 9% lower than the 2022 average, although the agency predicts that prices will bottom out over the next two months. Home prices have already started to climb in the Toronto region, as well as in Chilliwack, B.C., and other markets that saw the greatest price increases when borrowing costs were near zero. Realtors have reported that bidding wars are back amid a shortage of homes for sale.

CMHC said the economy could dip into a mild recession this year and predicted that the central bank will start cutting its key interest rate early in 2024. As mortgage costs fall, it forecasts that home prices, along with the volume of sales, will rise over 2024 and 2025.

Higher borrowing costs have priced some would-be buyers out of the market, forcing them to continue renting. That has reduced the number of rental units available and contributed to rising rental rates. CMHC predicts that trend will continue for most of the country’s major cities, including Victoria, Vancouver, Edmonton, Calgary, Regina, Toronto, Ottawa and Montreal.

“Rental market conditions are expected to further tighten, placing significant upward pressure on rents,” the outlook said. In Toronto, the country’s largest city and job market, the average monthly rent for an apartment built after 2005 topped $3,000 in March, a record high, according to Urbanation Inc. research.

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