Have you caught the latest Fall Housing Supply Report from the Canadian Mortgage and Housing Corporation (CMHC)? It provides some important insights into the state of Canada’s housing market. The report primarily focuses on housing starts—the construction of new homes—during the first half of 2024. While the report shows a 4% increase in housing starts across major cities compared to the previous year, it's clear that this isn't nearly enough to match the rising demand driven by population growth.
In Edmonton, housing starts soared by 67% over the same period in 2023. Calgary, another growth hotspot, reported a 38% jump in new starts, largely driven by an increased focus on building rental units. There’s also a noticeable trend of office-to-residential conversions in downtown areas, pointing to the shifting dynamics in urban development.
But perhaps the most startling takeaway from the report is this: a whopping 96% of Canada’s housing supply is funded by the private sector. CMHC, despite its high-profile role, is only responsible for 4% of new housing financing.
The Overwhelming Role of Private Sector Investment
With nearly all of Canada's housing supply coming from private investment, any policy changes that impact capital investment also directly influence housing availability. Many in the industry are witnessing a trend of developers, builders, and investors looking to pursue projects outside of Canada. A combination of high taxes, complex regulations, and challenging policies is making it harder for qualified investors to operate within Canada.
The Canadian Chamber of Commerce highlighted this trend some time ago, contrasting Canadian housing policies with those in the United States. While the U.S. doesn’t hold all the solutions, they are certainly attracting investment in ways that Canada is not. In our single-minded focus on curbing inflation, we’ve created a financial gridlock, particularly in the housing sector.
Understanding the Financial Gridlock
Canada’s current financial conditions are slowing the production of new homes. High interest rates have locked out both homeowners and small investors, preventing them from buying their first or next property. This leaves more people renting at a time when rental demand is surging due to immigration, all while rental prices keep rising. Saving for a down payment has become harder than ever.
On top of that, Canada’s banking system continues to apply its strict stress test, even to those who manage to save up. For developers, securing funding is no less challenging—they need to pre-sell a portion of units before banks are willing to lend. And even when they get the green light, high interest rates weigh heavily on their business plans, just as they do for homebuyers.
It’s a scenario where no one can make the first move until someone else does, creating a chain of inaction that keeps the housing supply frozen.
Is There Some Light at the End of the Tunnel?
Recent developments suggest a slight easing of these financial constraints. The Office of the Superintendent of Financial Institutions (OSFI) has announced it will no longer require the stress test for uninsured borrowers with over 20% down payment when switching mortgages. This change could have a notable impact on real estate investors and certain consumers. On top of that, Canada saw its third interest rate cut of 2024 in September, with another reduction expected soon.
These aren’t groundbreaking changes, but they do indicate a gradual loosening of financial restrictions, which could provide some much-needed relief to buyers and developers. The reduction in rates may signal the beginning of a shift that unlocks capital and, in turn, allows for more housing projects to move forward.
Government Policy: The Unspoken Issue
We haven’t even touched on one of the biggest challenges—government policies that heavily influence the building and development landscape. While CMHC is making efforts to improve financing for multi-family projects, their role is limited by ongoing staffing shortages, much like the rest of the industry. And with the public sector only contributing 4% of the funding to housing supply, it’s clear that the private sector continues to shoulder most of the burden.
A Traffic Jam of Housing Supply
Just like a traffic jam that starts with one car and soon spreads to hundreds, Canada’s housing supply problem is complicated and won’t be solved quickly. That said, there are signs of progress. Some forward-thinking developers, especially in Alberta, are finding ways to navigate the gridlock and get homes built despite the financial and regulatory challenges.
Up Next: Permitting Delays?
As financial hurdles begin to show signs of easing, could permitting delays become the next bottleneck in Canada's housing market? It remains to be seen. For now, the focus is on the slight but meaningful shifts in financial policy that may help unlock Canada’s housing supply gridlock.
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