No market correction in sight for under-supplied housing sector

The strength of the housing market has been front-page news for much of the last year. At a national level, May benchmark home prices reported by the Canadian Real Estate Association are up over 24% year over year, a record high.

The rapid increase in prices is eroding affordability, making it more difficult for first-time homebuyers to enter the market, creating significant financial advantages to homeownership over renting and triggering a debate about the sustainability of the housing markets and what policymakers should do about this.

It is generally accepted that the principal cause of the current situation in housing markets across much of the country reflects a chronic under-build of homes relative to the increase in population. Pre-pandemic, the ratio of the number of homes built over a 36-month period relative to population change was at its lowest level ever in Canada. 

This under-build created a structural imbalance between the number of homes needed in Canada versus the number of people living in the country. The imbalance was temporarily amplified over the last year owing to a number of pandemic effects: record-low mortgage rates, work-from-home requirements allowing some households to move farther away from their urban offices and mobility restrictions and home-schooling prompting others to look for larger units with more outdoor space.

The impact of this surge in demand compounded pre-existing supply challenges drawing speculators into the market and fear-of-missing-out behaviour, leading to the activity we have been seeing. The net effect of these factors was the tightest national housing market in our history. The national sales-to-new-listing ratio hit a high earlier this year, though it has since come down a bit.

In B.C., the sales-to-new-listing ratio rose as well, but the province – having a long history with tight housing markets – did not hit historical records on that metric. Housing inventories, that is the number of months of homes for sale in relation to the pace of sales, are at their lowest recorded level across much of the country, including B.C.

The current pace of home price increases is clearly unsustainable, and we expect it to ease gradually in the coming months. That should not be confused with an outright decline in home prices. In our view, the odds remain firmly tilted in favour of higher prices going forward for the simple fact that the number of available homes is too low relative to our population. In fact, when comparing the number of homes per capita in Canada relative to our G7 peers, Canada has the lowest number of homes (owned and rented) by quite some distance relative to much of the G7. To achieve the same ratio of homes to population as the average G7 country, Canada would need an extra 1.8 million homes. Compounding this poor showing, the federal government proposes to increase immigration substantially over the next few years. This will further strain the system unless we find a way to increase supply more rapidly.

Housing market dynamics are leading to some soul searching. While short-term factors such as an eventual rise in mortgage rates and the end of pandemic-related adjustment to housing preferences will lead to some cooling of the housing market, it appears unlikely that affordability will improve in any meaningful way unless much more serious efforts are devoted to finding ways to allow the supply of homes to meet demand.

Some provinces are taking this more seriously than others.

In B.C., the recently released Canada-British Columbia Expert Panel on the Future of Housing Supply and Affordability report is an excellent step forward. Governments at all levels must take the housing challenge much more seriously than they have over the last several years. Their focus should squarely be on allowing supply to be more responsive to demand and must include all forms of housing: owned accommodations, purpose-built rentals and social housing. There will also need to be an adjustment on the part of households. More densification is required, leading to better environmental outcomes, but it may also require that we shift our preferences to smaller residences. The Canadian homeownership rate is high by international standards. Canadians rent less than most Organization for Economic Co-operation and Development countries. That may need to change as we move forward.

With a federal election apparently looming, our hope is that housing issues feature prominently in all-party platforms. Unfortunately, this is not a problem the federal government can fix alone. Co-operation across all levels of government, developers and civil society organizations is required to achieve better housing market outcome for Canadians. Let’s hope that happens. •

Jean-François Perrault is Scotiabank’s senior vice-president and chief economist.