Analysis: From boom to glut: Canada’s housing plan may backfire on Trudeau

Construction workers next to a crane as they build their homes in Calgary, Alberta, May 31, 2010. REUTERS/Todd Korroll/File Photo

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OTTAWA (Reuters) – The Canadian government’s plan to ease runaway home prices by accelerating the pace of home construction threatens to increase construction costs in the short term and may lead to an increase in supply in the long term, experts said.

Pledging to double the number of home construction to keep pace with population growth and address the shortages that have helped fuel the property boom, Liberals Prime Minister Justin Trudeau last month outlined plans to build 3.5 million homes over the next decade.

But experts argue that Canada’s housing shortage is not as severe as the government suggests, noting that beginnings are on historic levels – about 250,000 units a year – with a record number of units under construction, although completions have been delayed.

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“I think we definitely need fresh supplies to meet the increased household growth as a result of immigration,” said Steve Pomeroy, a housing policy advisor and professor at Carleton University in Ottawa. “I think 3.5 million is a complete exaggeration.”

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He added that there are very real risks to trying to push the pace of construction too fast.

“The upshot is, if we try to increase it, we’re going to have a whole bunch of problems in the supply chain — labour, land, materials — and we’re going to push home prices higher,” Pomeroy said.

Alarm bells are already sounding in the Canadian construction industry, which is facing an acute labor shortage and retirement crisis, not to mention rising costs of lumber and other raw materials due to the global supply chain crisis. Read more

Home construction also generally falls under the purview of regional and municipal governments, which makes it difficult to formulate a national strategy.

National home prices have more than doubled since Trudeau took office in late 2015, and gains have far outpaced those made by the United States and Canada in the G7 over the past 15 years.

Rising prices have made homes in cities like Toronto and Vancouver too expensive for many residents, prompting authorities to take steps to ease the pressure. Trudeau’s government recently announced a two-year ban on foreign buyers.

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“We simply did not have enough housing supply in Canada to reflect the massive increase in our population compared to our G7 partner countries,” Canadian Housing Minister Ahmed Hussein said in an interview.

Hussain pointed to OECD data showing Canada has fewer homes per 1,000 people than the G7 average. The current shortage adds up to about 1.8 million homes, Scotiabank estimates.

With increased immigration and more young people creating new families, the current construction rate is hardly “shrinking” into the gap, said Bob Duggan, chief economist at Canada Mortgage and Housing Corporation, the National Housing Agency.

“It will take 36 years to get there at the current pace of housing construction,” Dogan told reporters late last month. “And we have some internal estimates that the need is much greater than the 1.8 million” that Scotiabank had forecast.

But critics of this assessment say Canada needs fewer homes overall because it has more people per household than the average for the Group of Seven, due to young children and intergenerational life. Canada’s home-to-population ratio is on par with the United States and the United Kingdom, which have had almost no price increases.

“Consider me skeptical in terms of the amount of massive supply shortfalls, perhaps outside of a few major hubs,” said Doug Porter, chief economist at BMO Economics.

A more intense construction attack also risks oversupply in the market. The last time Canadian home prices fell significantly was in the early 1990s, after rapid price gains in the previous decade triggered a construction boom and the ensuing oversupply.

With higher interest rates lowering demand and housing starting at elevated levels, it’s a situation that could repeat itself – up to a point – if construction increases too much.

“It’s very likely that you’ll end up with oversupply,” Porter said. “Personally, I don’t lose a lot of sleep because of it…but I wouldn’t completely dismiss that as a concern.”

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(Covering) Written by Julie Gordon in Ottawa Editing by Denny Thomas and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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