Michael Bourque is CEO of the Canadian Real Estate Association
It has been said that the COVID-19 pandemic accelerated many trends that had started beforehand. Think inequality, flexible work arrangements, online shopping and virtual meetings, learning and in real estate, open houses.
It also turbo-charged trends already well under way in housing markets in many parts of Canada. Following the introduction of the mortgage stress test, and then the pandemic lockdowns, buyers started looking further out from urban centres to smaller communities where they could live and continue working.
But the bigger underlying trend was the growing imbalance between supply and demand, with many “Coming Soon” signs seen outside new developments quickly replaced with those reading “Sold Out.”
At the end of February, 2020, there were 3.8 months of inventory nationally – the first time this measure had fallen below four months in some 15 years. It signalled the start of a nationwide seller’s market not seen since the 2002-07 period. That was before COVID.
Early on in the pandemic, some thought that supply would balloon and demand would crater amid an unprecedented recession and record job losses. (The data was so conflicting that we paused our forecasts).
But that was just a head fake. Demand surged at a time when home was everything, and many would-be sellers bolted the door and hunkered down in theirs to ride out the pandemic.
Even markets in resource-dependent areas – where mass jobs losses have seen home prices fall or remain flat for long periods – have shot right through the middle of balanced market territory and are now, incredibly, moving in the direction of a seller’s market. And the condo market, which lagged during the earlier days of the pandemic, is heating back up in 2021.
As of the most recent data available to January, 2021, sales for all types of residential properties were running at the highest level on record, and listings available for sale on Canadian MLS Systems were running at the lowest level on record. As a result, there are now just 1.9 months of inventory nationally. This is completely without precedent, and we’re just weeks away from the perennial spring surge in activity and many parts of the country are coming out of lockdowns at the same time.
It’s a perfect storm. Will it get worse before it gets better? Probably. The question is, how do we make it better?
Let’s take a deeper look at the problem. The first factor is population growth: it’s on pause right now, but between July 1 of 2018 and July 1 of 2019, Canada’s population rose by 531,497 people. And they all needed somewhere to live.
Next is demographics: we are an aging population that has gone from young to middle-aged. Middle-aged people tend to be homeowners.
So at this point we have record numbers of first-time homebuyers who are millennials, from their mid-20s up till about 40, coupled with record population growth set to resume from immigration – all vying for a record low number of homes for sale from a large, but currently occupied, housing stock.
Housing’s incredible structural demand is fuelled by historically low interest rates. But what about supply? The root cause of supply shortages is the significant monetary and non-monetary impediments that local and provincial governments have introduced, either to raise money or to satisfy nimbyism. A study by the C.D. Howe institute has detailed these impediments and the significant cost of development charges, land transfer taxes, approval delays and other costs that end up increasing the cost of a home. These costs add up to more than $200,000 per home in supply-restricted cities such as Toronto and Vancouver.
Low interest rates have been somewhat balanced by macroprudential measures that have been introduced over the past decade. These measures include a stress test that ensures individuals looking for an uninsured mortgage are qualified for a mortgage that is the greater of either the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada. Currently the latter is close to three percentage points above what well-qualified buyers are actually able to secure from lenders. But these longer-term safeguards are not long-term solutions to the supply issue. If anything, they have probably served to make some builders more cautious.
In other words, more taxation and more regulation are not the solution to this problem. We need to start swinging hammers.
The Canada Mortgage and Housing Corp. has set a goal that by 2030, everyone in Canada will have a home that they can afford and that meets their needs. However, many feel like that goal is getting further out of reach. After all, “everyone in Canada” is a number that gets bigger every year.
Policies that significantly increase the supply of homes available for people to choose from and/or enable people to adapt and improve their current properties are the best way to address this goal. These would help to put the country back to work and help to keep homeownership affordable for the next generation of Canadians.
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