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New homes are built in a housing construction development in the west-end of Ottawa on May 6, 2021.Sean Kilpatrick/The Canadian Press

Canada needs an additional 5.8 million homes by the end of the decade to help lower average home costs and ensure households are not spending more than 40 per cent of their disposable income on shelter, according to a new government report.

That target blows past the current projection of 2.3 million new homes by 2030, according to the Canada Mortgage and Housing Corp. report, and would require building of new homes to more than double from current levels.

“There must be a drastic transformation of the housing sector,” said Aled ab Iorwerth, CMHC’s deputy chief economist, adding that an “all-hands-on-deck approach” is needed to ramp up the country’s housing stock.

CMHC reports Canada’s housing starts up 8% in May from April

Although home prices nationally are starting to drop due to a sharp jump in interest rates and borrowing costs, they are still at least 50 per cent higher than two years ago. As of May, the price of a typical home across Canada was $822,900, with values well above $1-million in the Vancouver and Toronto regions.

“There are very significant economic risks to large cities if they do not get housing costs under control,” Mr. ab Iorwerth said on a call to discuss the report. “It’s getting increasingly difficult to attract skilled workers and even highly skilled workers to these cities because they’re just becoming simply unaffordable,” he said.

The report is the first government study to attempt to quantify the housing supply shortage and adds another voice to the debate about the mismatch between supply and demand and the causes of the country’s housing affordability problem.

CMHC, the federal government and most of the real estate industry believe that a shortage of housing is the main contributor to the runup in home prices. But some economists and housing advocates argue that prices have climbed due to other factors, such as persistently low interest rates and the influx of real estate investors.

The CMHC report used 2003 and 2004 for its benchmark on affordability. The agency described those years as a period in recent history when housing costs were relatively low in proportion to average incomes and a time when the economy was stable. During that period, the average household spent about 35 per cent of after-tax income on shelter. That has since increased to nearly 50 per cent nationally; 56 per cent in Ontario and 58 per cent in British Columbia.

In order to bring household affordability back to the 2003 and 2004 levels, CMHC said the bulk of the 5.8 million new housing units are needed in Ontario and B.C. and housing costs would have to be significantly lower.

“Restoring affordability levels in these provinces means cutting housing costs by between a quarter and two-fifths,” the report said. Quebec also requires additional housing, though CMHC said the other provinces remain largely affordable for households with average income.

The report laid out targets for home prices to be considered affordable by 2030. For example, in Ontario, the average home price should be $551,000 so that housing costs for the average household are affordable at under 40 per cent of the household’s disposable income. Last year, the average home price in the province was $871,000.

CMHC contends that the cost reductions do not mean homeowners will see the value of their homes drop. Mr. ab Iorwerth provided an example in which four detached houses worth millions of dollars could be redeveloped into hundreds of apartment units. That would lead to the average price declining. “It doesn’t necessarily mean that anybody would lose out on their housing value,” he said.

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Housing development in Brampton, Ontarios L6P area, on Sept 2, 2021.Fred Lum/the Globe and Mail

If economic growth slows significantly or the economy contracts for a prolonged period of time, the report said less housing would be required. Currently, demand from home buyers has dropped as the cost of a fixed-rate mortgage has doubled over the past 12 months.

With the Bank of Canada set to continue pushing interest rates higher to arrest inflation, there are fears the increases will trigger a recession.

Home builders are expected to slow or cancel housing developments because construction costs have jumped due to labour and material shortages.

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