- We maintain our 2022 projection that Canada needs about 3.5 million additional housing units by 2030 to restore affordability.
- We expect housing demand to vary across the country due to evolving economic and demographic conditions.
- Most of Canada’s housing supply gaps are in Ontario and British Columbia. Quebec and Alberta are also projected to need more supply because of economic growth.
- A smaller overall housing stock in 2030 is projected from what we reported last year. The main reason for this decline is the current shortfall in housing construction.
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CHARLES: There are several factors that are making housing more expensive but the biggest issue is supply. Simply put, Canada is facing a housing shortage. Housing supply over the last 20 years has been weak to respond to demand in some of Canada’s largest urban areas resulting in the loss of affordability. In June 2022, CMHC released a report that concluded that 3.5 million more homes, that is what is above and beyond what is currently projected to being built, are required to help reach affordability for everyone living in Canada by 2030. A year later, CMHC has released an update to this initial study as further examination of housing needs across Canada was conducted by our team of experts.
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(Visual: Two people are shown in conversation. They sit across from one another at a boardroom table. The two individuals are Charles Sauriol, Communications & Marketing, CMHC, and Aled Ab Lorwerth, Deputy Chief Economist, CMHC.)
CHARLES: Hello and welcome. My name is Charles Sauriol and I’m pleased to be hosting this discussion on supply gaps. With us today is the person that is responsible for leading this work, CMHC’s deputy chief economist, Aled Ab Iorwerth. Aled, thanks for joining us.
ALED: Thank you.
CHARLES: So we released this report last year and it is still getting a lot of play. It’s being referenced in a lot of coverage. It’s being mentioned in analysis and commentary by stakeholders and decision makers. So maybe if you could just take us back to where this work initiated and how we came about to this number.
ALED: Sure. So obviously, housing affordability has been a challenge for Canadians for quite a while. The government has been consistently trying to understand more and more about what is going on with housing so our initial work, and this is going back to 2017 – 2018, was really trying to understand reasons behind escalating house prices for the last decade and what we identified in that research was that yes, demand is going up, population, economic growth, at that time interest rates were coming down so yes, demand was going up but unfortunately, the supply site in many cities was not responding very rapidly. So from that 2018 report, we identified the supplier responsiveness particularly in Toronto and Vancouver as being critical factors so we published that result. That report had some impact but the question that kept on coming back to us was okay fine, it’s supply, but how much are we talking about and so that’s what the report last year was trying to address saying you know, is it 100,000, is it 5 million, it was trying to make it more solid what the exact number of housing units that was required.
ALED: Now I mean it’s not that exact, I mean there’s a lot of approximations involved but I think what’s coming across from the work is just the scale of how much more housing we need.
CHARLES: And how did you build or develop the methodology and the modeling to get to that result?
ALED: Well, we ultimately highjacked an approach that had been developed in England where they also had identified housing supply as a problem. I think the key differences in our modeling approach is that yes, we use demographic patterns as an explanatory factor and this has been the traditional approach and planning approaches to just how much more population do we have, but what we did in this approach was to layer on economics on top of that. So yes, we have population growth but we also have higher incomes. We may have changing interest rates and so forth and all of these economic factors are also contributing to the demand for housing. And obviously, once you start to include these economic factors, then you can start to talk more concretely about affordability so affordability, housing cost and income, these are essentially economic issues and so we needed to have an economic model including the demographics that looked at what was going on.
CHARLES: Obviously, the end goal is achieving affordability for everyone living in Canada. So what does that mean? How do we actually define that?
ALED: Well, that’s a fair question. It’s a bit of a limitation of our current approach because we’re really taking a top down approach. We’re taking the average person in a province so we’re looking at what’s the cost of housing is buying a home for the average household in a particular province. So it gives us a first pass, it gives us an impression of what’s going on with affordability and of stressing how much additional market supply of housing we need you know, getting the private sector involved in that. So that’s a first role but clearly, we need to dig in more into this, we need to have the rental sector more explicitly in there because clearly, low income Canadians, middle class Canadians for them the rental sector is extremely important as a way of getting an affordable place to live in these extremely expensive cities like Toronto and Vancouver so that is certainly an area we’re going to dig in more on trying to understand their challenges, trying to understand how we can build more rental supply because housing affordability is just simply out of reach for many people in places like Toronto and Vancouver.
CHARLES: And is the key fulfilling the need in the rental sector, in the purpose built rental sector, is that the key?
ALED: Well, it’s clearly extremely important. It’s something that can immediately help affordability. One of the challenges with getting more market supply, more market housing, homeownership is that it takes time particularly to help people with low incomes so having more purpose built rental, more construction is a faster way of getting overall affordability.
CHARLES: Right, right and so we released this last year and it had the impact that we’re seeing and we’re coming back a year later and we’re doing an update. So what can you tell us about what’s changed in this last 12 months, shall we say?
ALED: Well, there’s been a lot of changes and we were not very sure about how things were going to turn out because there are a lot of offsetting factors. There’s also the question of timeframe which is quite difficult so we were to take the supply site first. We were quite concerned for example that with higher interest rates in order to control inflation that this would have a very negative impact on housing supply and so we’re already starting to see that in some of the data that housing starts have come down. There are other aspects as well sort of we had heard that immigration policy was there were more people coming to Canada and there was increasing demand for housing so there was a lot of these countervailing forces. I have to admit that I wasn’t completely sure how the numbers would end up because there was this confusion of forces. We were also coming out of the pandemic, economic patterns were highly uncertain, population have been moving around so it was trying to update the work so that we can see like what exactly is going on.
CHARLES: Right. And so basically this update is the gap remains fairly stable at 3.5 million but the geographic breakdown has shifted a little bit, right? So can you elaborate a bit more on that?
ALED: Right. So like I said, we were coming out of the pandemic, economic projections are always a bit uncertain, that may have thrown us a little bit. The relationship in population movements across the economy so what we’re generally finding is that yes, 3 and a half million still to gap with the national level but we’re lowering our projected economic growth for Ontario in particular and so the gap is quite a bit smaller in Ontario but then we are seeing increased economic growth in Quebec and Alberta in particular and so the gap is increasing in Quebec and Alberta. So there’s a lot of these shifts across the country. I think this is the advantage of including the economics into the model because you develop this richer picture of what is driving the housing market and demand for housing.
CHARLES: So Ontario is going to be seeing a bit less growth between now and the end of the decade. What factors are contributing to that exactly?
ALED: I think there’s a lot of factors. Part of it is just maybe we were too optimistic coming out of the pandemic and we were too optimistic last year about economic growth. The higher interest rates at the moment are lowering overall economic demand and maybe that’s having a bigger impact in Ontario than in Alberta because Alberta is in general following the evolution of natural resources so there’s a little bit of a different dynamic there.
CHARLES: Is there also an issue of interprovincial migration?
ALED: Yeah, certainly. That’s what we’re starting; I don’t want to be too definitive on it but we are seeing some rising population particularly in the Maritimes so the supply gap is going up a little bit in Nova Scotia. It’s a little bit of a concern as well in the sense the population may be leaving Toronto and Vancouver because of the higher house prices so I mean to a certain extent that’s lowering the supply gap in Toronto and Vancouver but maybe not for the right reasons.
CHARLES: Correct, right, good point. And also looked at alternative scenarios. Maybe you want to touch a little bit more on that as whereas we forecast a different outcome in the 2020s.
ALED: Sure. So one of the current preoccupations for example is the elevated level of immigration into Canada so that is clearly having an impact in the short term on house prices and affordability in general including rents but we want to reemphasize that what we’re looking at in this work is what is happening in 2030 and so the current immigration policy does not last until 2030. Nevertheless, we thought it was important to have a look at what would happen hypothetically if there were a continued increase in population growth to 2030 and in that case, we find a substantial increase in how much housing is needed. So currently, it’s 3 and a half million above what is projected anyhow and if we continue at very elevated growth of population, which is not current government policy, then the gap would increase to 4 million above what we project. The idea was to try and explain sensitivity of the model to various factors.
CHARLES: So regardless, we’re looking at massive, massive need of increasing supply.
CHARLES: This year is not going great. We’re seeing a slowdown in construction. A high interest rate environment is contributing to that. Is that also problematic in order to help us meet that gap?
ALED: Right, because I mean supply built this year will obviously still be available in 2030 so if we have a sizeable slowdown in supply this year, this will impact where we are in 2030. The particular concern we have is with some of the apartment structures whether for ownership or for rental. These are very large capital intensive projects and therefore very sensitive to interest rates, getting construction financing and so we’re concerned at the moment. Data is a bit noisy, there will be quite a shortfall this year.
CHARLES: And you know, obviously this is really really eye opening for decision makers and players in the industry. What do they need to take away from this work?
ALED: I think whether our numbers are right or wrong, I think what they need to understand is the scale of the challenge. We are talking about millions of units beyond what is currently projected so you know, we have 3 and a half million, whether it’s 2 and a half, 4, I mean this is a massive step change in what we need to do so business as usual. Tinkering with current approaches is not going to cut it. We need drastic changes, all hands on deck. We need all sorts of changes in government policy but we also need changes in the private sector. The private sector needs to get a lot more efficient at building, making more rapid building at scale, better technologies but that goes hand-in-hand with better government policies to encourage construction and in some cases, get out of the way.
CHARLES: And innovation of course.
ALED: Yeah, innovation in the private sector, innovation in government policies. The digital revolution seems to be passing this sector at the moment a little bit unnoticed so there must be a lot of scope to increase productivity, efficiency, innovation.
CHARLES: Yeah, exactly, great. And so before we go, I know that this work is not done, it’s ongoing. What can we expect down the road because we get a good idea of the general scope but how about more granular, more defined data?
ALED: Right, and that’s where the rubber meets the road so we’re really trying to dig in at the more relatively local level so what’s going on in Toronto and Vancouver rather than Ontario and B.C. So we need to develop that greater granularity. Obviously, housing affordability is a greater challenge for lower income Canadians, middle class Canadians so we need to understand more about what is happening across the income distribution. So we’re digging into these aspects, we’re looking at the impact on labour mobility across Canada so we have a stream of projects and we’ll be releasing these overtime hopefully by the end of the year and into next year.
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CHARLES: Great. Thank you so much, it was really eye opening so thank you for your time.
ALED: Thank you.
CHARLES: And thank you to our viewers today. Please check the description below for a link to CMHC’s full report on supply gaps estimates and we do want to hear from you. Feel free to leave a comment with your feedback on the report and this discussion. Stay tuned for more conversations with our housing experts and be sure to subscribe to our newsletters and to our YouTube channel and be sure to follow us on Twitter, LinkedIn and all of our social media platforms.
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