Housing supply

Why is the housing supply so low?

There is no other way to sugarcoat what is happening in the Canadian housing market: the country is facing a severe shortage of supply. Why is the housing supply so low?

Current market conditions, whether record inventories or strengthening demand, have triggered a crisis in housing affordability. With interest rates rising and an inevitable increase in the mortgage stress test, buying a home within typical Canadian incomes and budgets will become more difficult this year, and potential for the foreseeable future.

But while factors such as historically low interest rates and pent-up economies in the pandemic era have contributed to the current real estate frenzy, the fundamental principle of supply and demand has been the main element of the current real estate boom. Is speculation a factor in today’s ultra-bull Canadian real estate market? Yes, but there are other dynamics behind the surge in earnings. Housing supply is one of them.

Why is the housing supply so low?

Why are stocks so low? There is a reason the term “crisis” is used. So, let’s explore five main reasons why housing supply is as low as it is today.

#1 The pandemic has changed consumer trends

The COVID-19 public health crisis may have permanently changed how or why people buy residential properties. The coronavirus pandemic has led many families to purchase larger spaces so they can work and study remotely and spend more time in a busy home. Many households also abandoned the big cities, selling their homes at a substantial profit and moving to smaller towns and rural communities, absorbing a limited inventory of affordable three-bedroom homes. With exceptional net worth and favorable mortgage rates, these “movers” homebuyers could – and did! – outbid their rivals.

#2 New home construction activity has collapsed

For more than a decade, single-family dwelling completions have been below the five-year average. Construction activity has been subdued since peaking in 2006, although it is gradually picking up. It might come as a surprise to learn that Canada maintained an oversupply of homes on the market, which caused home valuations to plummet during the Great Recession in 2008. What a difference a few years can make.

#3 Housing starts are not keeping up

Meanwhile, housing starts in Canada have crossed the 300,000 mark only once in the past year (305,512 in November), according to data from the Canada Mortgage and Housing Corporation. (CMHC). Housing growth and types will also vary by jurisdiction, CMHC noted in a March news release.

On a trend and monthly SAAR basis, the level of housing starts activity in Canada remains historically high; however, the six-month trend in housing starts fell slightly from January to Februarysaid Bob Dugan, CMHC’s chief economist. “For SAAR housing starts in urban Canada, both single-detached and multi-unit housing starts increased in February. Among Montreal, Toronto and Vancouver, Toronto was the only market to show growth in total SAAR housing starts in February, due to higher condominium and multi-unit housing starts.

#4 Not enough active ads

The same trend is evident in many housing markets: current listings are below the five- and ten-year averages. This is prevalent across many real estate industries, claiming that two-thirds of the nation’s real estate markets are tilted in favor of sellers. In effect, future owners are snapping up all the residential properties they can find, leading to bidding wars and high prices.

But there is a silver lining to all of this.

According to the Canadian Real Estate Association (CREA), new residential listings rebounded, rising 23.7% month-over-month in February, compared with the 10.8% decline recorded in January.

As expected, after a small lull in January, we saw the first batch of Spring 2022 listings hit the market in February, and they were quickly picked up by buyers, CREA President Cliff Stevenson said in a press release. “It’s unclear if this is the start of a re-emergence of some of the many potential sellers that had been dormant for two years, or if supply will fade towards summer as it did in 2021.”

Why is the housing supply so low_chart 2

#5 Zoning laws in major urban centers

Zoning laws have been restrictive and, according to the Ontario government’s Housing Affordability Task Force, “exclusive” in many parts of the provincial housing market. This zoning law prohibits the construction of triplexes, townhouses, and low-rise apartment buildings in many residential neighborhoods, which is common in other parts of the country. Therefore, the erection of a so-called “soft density” would not be permitted in a Rosedale or Danforth neighborhood in Toronto. Despite the opportunity for more housing, a mix of NIMBYism and outdated public policy efforts have added to price pressures in recent years.

How bad is the offer in Canada?

Scotiabank recently released a research note which confirmed that Canada maintains the lowest per capita housing stock of the G7 countries, with Ontario having the lowest per capita housing rate in the country. The financial institution proposed this figure: the province itself would need to build 650,000 new homes to reflect the national average. What about future growth?

Looking to the future, we remain of the view that the chronic shortage of housing relative to population needs will put upward pressure on prices and reduce affordability.“wrote the bank.

Will this force more families and newcomers to abandon the major urban centers of southern Ontario and British Columbia? If there is nowhere to live, they may have no choice but to consider Winnipeg.