Canada is building fewer homes today than during the 2020 lockdowns -- and ‘the worst is yet to come’

‘We need more housing, but the bank is slamming that door shut,’ says the author of a new report.
Thestar.com
Oct. 4, 2023
Clarrie Feinstein

As the fallout from the Bank of Canada’s interest rate hikes continues, fewer homes are being built today compared to the lowest point in the pandemic -- the 2020 lockdowns -- and it’s going to get worse, an economist says.

The provincial government has repeatedly claimed that Ontario needs to free up more land to build houses, but according to the report, lack of land is not the issue. Instead, the report from the Canadian Centre for Policy Alternatives finds that building has slowed because inflation and the high cost of materials has made home building less profitable for developers, and there are fears the market will slow due to higher mortgage rates.

Investment in new single-family homes in July of this year was down 21 per cent from the level in April 2020, the lowest point in the pandemic, the data shows. New row homes were down eight per cent, and new apartment construction, which includes condos, was down two per cent.

The situation is even more “dire” when comparing the number of current new builds to February 2022, just before the rate hikes began, the report says.

Investment in single-family homes is down 36 per cent, semi-detached houses declined by 27 per cent, and apartment buildings cratered by 19 per cent.

“The Bank of Canada estimates that the worst impacts of rate increases take two years to hit the housing sector and the housing sector is the main vehicle for rate hikes to hit the economy,” said David Macdonald, senior economist and report author. “Right now, it has been 18 months since the first rate increases, but most of the bigger rate increases have occurred in the past 12 months -- so the worst is yet to come.”

Because it takes five to 10 years between the initial planning phase and new builds coming to market, there will be a significant shortfall of much-needed housing in the future, he said, which will have “real life” consequences for those who need housing.

“Often, we talk about rate hikes in a theoretical sense, but we’re seeing the real impact starting to hit the market where real estate feels it the most acutely,” Macdonald said.

During the first lockdowns in 2020 the Bank of Canada dropped the overnight lending rate to 0.25 per cent, making it cheaper for people to borrow money. Even with the construction industry at a standstill, developers and builders saw an opportunity for substantial returns on their investments once the lockdowns ended, Macdonald said.

But now that the overnight lending rate is five per cent, building new homes might not have the payoff developers are looking for -- especially if people who bought pre-construction homes aren’t able to afford the mortgage by the time the home is available.

New construction home sales in the GTA plunged to a 23-year low in January, as prices dipped on both a year-over-year and a monthly basis with consumers hesitating amid higher borrowing costs.

“(Developers are) no longer seeing that these projects will be a good investment for them, especially with the additional high cost of materials and labour,” he said. “That’s why we need less reliance from the private sector.”

In the short-term, to combat rising home costs brought on by a supply crunch, non-profit housing providers and post-secondary institutions could buy existing for-profit apartments and convert them into non-market buildings with lower rent, he said.

Governments could also outlaw Airbnb and other short-term rental platforms from big cities for five years to shore up housing while providing “some breathing room” for new builds. It’s not unheard of, as, recently, New York City created stricter regulations for Airbnb, by ensuring all hosts register with the city, live in the place they’re renting and are present when someone is staying.

Municipalities could also rapidly change zoning to accommodate more new builds and create greater density, he added. And governments could reinstate stricter rent control to ensure there is affordable housing even if it might hinder incentives for private developers.

“The Bank of Canada wants to slow down the economy and slowing down residential construction is one way to do that,” he said. “We need more housing, but the bank is slamming that door shut.”