Housing supply

Homebuilders tackle Canada’s housing shortage

Housing supply in Canada was falling short of demand even before COVID hit, a situation the pandemic has highlighted. It’s not that homebuilders have been idle. Housing starts over the past 12 months have been the strongest since the mid-1970s, and the number of homes under construction is at an all-time high. The problem is that it takes time for new construction to reach the move-in stage. The average time has more than doubled over the past two decades, from 9 months to 21 months.

The construction boom is starting to provide more ready-to-move-in supply. Housing completions are expected to accelerate in the coming year, provided supply chain disruptions in the construction sector do not interfere too much with ongoing work. Yet the market impact will vary across the country. Smaller markets are seeing the greatest 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 subdued and heavily concentrated in slower-to-build multi-unit housing. Supply issues in major cities are expected to persist, especially as stronger immigration will drive up demand for housing in the years to come.

The pandemic has cracked the builders like in 1977

The pandemic has triggered a sharp drop in interest rates, a huge accumulation of household savings and changing housing needs that have sent an unprecedented wave of Canadians rushing to buy homes. The stampede siphoned off the inventory of existing homes for sale and depleted inventory of newly built homes, particularly for single-family homes and other sought-after low-rise homes. These prices, along with the price spike, were clear signals for builders — and municipal authorities issuing permits — to crack and expand the housing stock in Canada.

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

There have never been so many units under construction in Canada

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

So far, new homes ready for occupancy are increasing much less dramatically

All of this construction activity has yet to significantly boost the supply of move-in loans. It can take anywhere from six months to several years to complete a unit, depending on the type. Various pandemic-related disruptions and challenges have undoubtedly prolonged the process. Still, completions are on the rise: Builders have completed 215,000 new units in the past 12 months, compared to an average of 193,000 units from 2015 to 2019. That’s still below the 220,000 average increase in households. Canadians over the four years. preceding the pandemic.

The pace is about to pick up

We expect completions to increase significantly 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 lead times) should also support a high number of completions beyond next year. While many factors could alter delivery schedules, we believe as many as 240,000 homes could be completed in 2022 nationwide, the biggest push in a generation to address supply issues. Higher levels like this will need to be repeated in future years to offset the underbuilding of the past decade and to meet growing demand stemming 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 lifestyle and relative affordability during the pandemic has sparked a construction boom unmatched among major markets (by any proportion). Rural areas and small towns have seen the strongest growth in housing starts over the past 12 months compared to the 2015-2019 period, increasing by 51% and 33% respectively. Medium-sized cities were not left out with an increase of 27%. In addition, the types of housing built are mainly (70%) detached houses and other houses on the ground, whose construction times are generally shorter. This means that builder response in smaller markets is not only significant in terms of size, but its impact on supply will be faster than in large metropolitan areas where apartments have accounted for 62% of housing starts over the past few years. last 12 months.

That’s not to say big-city builders have been dragging their feet during the pandemic. They, too, poured a lot more foundations (housing starts jumped 23%). Indeed, 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 completion time will be longer for most.

The picture on the main markets is mixed

Housing starts have barely increased in the Toronto area over the past 12 months compared to the 2015-2019 average, rising only 1.4% or 500 units. The rise in new construction was a little stronger in Edmonton (+4.1%), Calgary (+7.2%) and Vancouver (+10.3%) but still well below the national average (+26%). Relatively stable housing starts in the Toronto area partly reflect a significant decline in condominium apartment sales prior to construction in 2018 and 2019 following Ontario’s Fair Housing Plan in 2017. A recent increase in the issuance of building permits suggests that the pace could pick up. Otherwise, the supply response will look disappointing in the region, prolonging the significant challenges faced by buyers and renters.

Builders are working hard to resolve supply issues in Montreal and Ottawa. Housing starts over the past 12 months have increased by 11,000 units (or 50%) compared to the 2015-2019 average in the Montreal area, and by 5,700 units (or 65%) in Ottawa-Gatineau. Purpose-built rental units accounted for more than 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 being built?

The number of homes expected to come on 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 begin construction on projects only after firm sales agreements have been reached. The market response is therefore yes. At the same time, new supply is unlikely to fill the huge housing gap for Canadians of modest means. High and rising construction costs pose huge challenges for builders to produce more affordable options, leaving many Canadians struggling to climb the housing ladder.

The pandemic has also challenged several previous housing preferences. Extended time spent at home has prompted many Canadians to seek larger living spaces and loosened the attachment to living in urban centres. While it’s unclear how permanent these changes will be, it’s possible that the size, configuration, and location of units in recently launched high-rise projects may fall out of favor. Apartments (condominiums and purpose-built rentals) not only accounted for the most (55%) of starts over the past 12 months, but also posted the largest increase (39%) over the average of 2015-2019.

New housing mix needs to be recalibrated

Slow supply response 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 increasing housing starts over the past 12 months, it still takes nearly two years on average to build a home (varying widely across building types). housing). This average construction time 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 much larger share of houses built. Limited building capacity was also a factor in some parts of the country. And those timelines don’t even count the time (and resources) it takes to get the proper approvals and permits to put the shovels in the ground.

Part of the solution to Canada’s housing market imbalance involves mixing new units being built: a recalibration toward project types that can deliver move-in ready units to the market faster, such as low or medium-rise dwellings, would stimulate supply responsiveness. Addressing the “missing middle” (lack of medium-density housing) in some of Canada’s largest urban areas, for example, would be an important step in this direction. This should be done in conjunction with a particular focus on streamlining regulatory and project approval processes, and addressing skilled labor shortages and other constraints that limit productive capacity.

Robert Hogue is a member of the Macro and Regional Analysis Group at RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for provincial economies. His publications include housing trends and affordability, provincial outlooks and provincial budget commentaries.


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