Homebuilders Tackle Canada’s Housing Shortage

The supply of housing in Canada was lower than demand even before COVID hit, a situation that the pandemic has greatly alleviated. It’s not that home builders have stood idly by. Housing starts over the past 12 months were the strongest since the mid-1970s, and the number of homes under construction is at an all time high. The problem is, it takes time for new construction to reach the move-in stage. The average delay has more than doubled over the past two decades, from 9 months to 21 months.

The construction boom is starting to provide more supply ready to move in. Housing completions are expected to accelerate in the coming year, provided supply chain disruptions in the construction industry do not interfere too much with work in progress. Yet the impact on the market will vary across the country. Smaller markets experience the largest relative increase in housing starts and will get more supply sooner. The wait will be longer in some of Canada’s largest markets, where the pandemic construction boom has been more moderate and heavily concentrated in multi-family housing that is slower to build. Supply problems in large cities are expected to persist, especially as stronger immigration drives up demand for housing in the years to come.

The pandemic has cracked the manufacturers as if it were in 1977

The pandemic has triggered a sharp drop in interest rates, a huge build-up in household savings and changing housing needs that have sent an unprecedented wave of Canadians rushing to buy homes. The scramble has siphoned off the stock of existing homes for sale and depleted stocks of newly built homes, especially for single-family homes and other sought-after low-rise homes. These prices, along with soaring prices, have proven to be unambiguous signals for builders – and municipal licensing authorities – to make their voice heard and expand Canada’s housing stock.

Their response was dramatic. Over the past 12 months, builders across the country have laid the groundwork (defining a housing start) for more housing units (260,500) than at any time since 1977. This represents an increase by 26%, or 53,600 units, compared to the 2015-2019 average rate (206,900 units).



There have never been so many units under construction in Canada

The pile of new projects has put more pressure on the already record-breaking workload of builders. There are now nearly 320,000 housing units under construction in Canada. This is by far the highest number, and an increase of 12% (or more than 30,000 units) from the end of 2019. About three-quarters of the total are apartments (mainly condos but also rentals. ).



So far, new homes ready to be occupied are increasing much less dramatically

All this construction activity has not yet significantly increased the ready-to-move-in supply. Completing a unit can take anywhere from six months to several years, depending on the type. Various disruptions and challenges associated with the pandemic undoubtedly lengthened the process. Still, completions are on the rise: Manufacturers completed 215,000 new units in the past 12 months, compared to an average of 193,000 units from 2015 to 2019. This continues to be lower than the average increase of 220,000. the number of Canadian households over the four years. preceding the pandemic.



The pace will pick up

We expect completions to increase dramatically over the coming year as builders put the finishing touches on units started before and during the pandemic. The large number of apartments under construction (with generally longer production times) should also support a high number of completions beyond next year. While many factors can alter delivery schedules, we believe up to 240,000 housing units could be completed nationwide by 2022, the biggest push in a generation to address supply issues. Higher levels like this will need to be repeated in the years to come to compensate for the under-construction over the past decade and to meet the growing demand resulting from projected record immigration. Relative to population, completions remained below their long-term average throughout the 2010s.



Smaller markets to see a faster increase in supply

Canadians’ love affair with the small-town way of life and relative affordability during the pandemic sparked a construction boom unparalleled among the largest markets (all proportions considered). Rural and small urban areas recorded the strongest growth in housing starts over the past 12 months compared to the 2015-2019 period, increasing by 51% and 33% respectively. Mid-sized urban areas were not far behind with an increase of 27%. In addition, the types of dwellings built are mainly (70%) single-family houses and other houses oriented towards the ground, which generally have shorter construction times. This means that the response from builders in small markets is not only important in terms of size, but its impact on supply will be faster than in large metropolitan areas where apartments accounted for 62% of housing starts over the past 12 months. last months.

That’s not to say builders in major cities dragged their feet during the pandemic. They too have laid a lot more foundations (housing starts soared 23%). In fact, census metropolitan areas (CMAs) accounted for the bulk (38,000 units) of the overall increase in housing starts (57,000 units) compared to the 2015-2019 average. It’s just that the timeline to completions will be longer for the most part.



The situation in the main markets is mixed

Housing starts have barely increased in the Toronto area in the past 12 months compared to the 2015-19 average, increasing only 1.4% or 500 units. The rise in new construction was somewhat stronger in Edmonton (up 4.1%), Calgary (up 7.2%) and Vancouver (up 10.3%) but still well below the national average (26%). Relatively stable housing starts in the Toronto area partly reflect a significant drop in pre-construction condominium sales in 2018 and 2019 following Ontario’s Fair Housing Plan in 2017. A recent peak in permitting to build suggests that the pace could pick up. Otherwise, the supply response will appear disappointing in the region, prolonging the significant challenges facing buyers and tenants.

Builders are working hard to fix supply issues in Montreal and Ottawa. Housing starts over the past 12 months have increased by 11,000 units (or 50%) from the 2015-2019 average in the Montreal area, and by 5,700 units (or 65%) in Ottawa-Gatineau . Purpose-built rental housing represents over 90% of the increase in Montreal.


The pace stalled in Toronto but exploded in Montreal and Ottawa

Housing starts in units | Choose the market to display:


Are the right types of units built?

The sheer number of homes that are expected to hit the market is one thing. But will they be the right ones to meet demand across the country? Yes and no. Most of the new units have already found takers. Builders and developers most often do not begin construction of projects until they have entered into firm sales agreements. The market response is therefore yes. At the same time, the new supply is unlikely to fill the huge housing deficit for low-income Canadians. High and rising construction costs pose huge challenges for builders to provide more affordable options, leaving many Canadians struggling to access the housing ladder.

The pandemic has also called into question several previous housing preferences. The extended time spent at home prompted many Canadians to seek larger living spaces and relaxed their attachment to living in central urban areas. While it’s unclear how permanent these changes will be, it’s possible that the unit’s size, configuration, and location of recently launched high-rise projects may fall out of favor. Apartments (condominiums and specially designed rentals) not only made up the most (55%) of housing starts over the past 12 months, but also posted the largest increase (39%) from the 2015-2019 average. .



Mix of new homes to be recalibrated

Slow supply has been a central issue for the Canadian housing market for years. While we are encouraged to see municipalities issuing more building permits and builders accelerating housing starts over the past 12 months, it still takes almost two years on average to build a house (varying widely by type of house). lodging). This average build length has more than doubled over the past two decades. The main reason is that apartments (which take the longest time to build) now represent a significantly larger share of houses built. Limited construction capacity has also been a factor in parts of the country. And those timelines don’t even count the time (and resources) required to get the proper approvals and permits to dig shovels into the ground.

Part of the solution to Canada’s housing market imbalance is through the mixing of new units under construction: a recalibration towards types of projects that can deliver move-ready units to market faster, such as new housing units. low or medium height, would stimulate the responsiveness offer. Addressing the “missing link” (lack of mid-density housing) in some of Canada’s largest urban areas, for example, would be an important step in that direction. This should be done in conjunction with a particular focus on streamlining regulatory and project approval processes, and addressing skill shortages and other constraints that limit production capacity.



Robert Hogue is a member of the Macroeconomic and Regional Analysis Group of RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for the provincial economies. His publications include Housing Trends and Affordability, Provincial Outlook, and Provincial Budget Commentaries.

Disclaimer

This article is intended for general information only and should not be construed as constituting legal, financial or other advice. A professional advisor should be consulted about your particular situation. The information presented is believed to be factual and up to date, but we do not guarantee its accuracy and it should not be taken as a complete analysis of the matters discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third party or of their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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