Canada needs an additional 5.8 million homes by the end of the decade to help lower average home costs and ensure families don’t spend more than 40 percent of their disposable income on shelter, according to a new government report.
This goal exceeds current projections of 2.3 million new homes by 2030, according to a Canada Mortgage and Housing Corporation report, and will require new home construction to more than double from current levels.
“There has to be a radical shift in the housing sector,” said Aled ab Iorwerth, CMHC’s deputy chief economist, adding that a “deck business approach” is essential to boosting the country’s housing stock.
CMHC reports that housing starts in Canada started rising 8% in May from April
Although home prices nationwide have begun to fall due to the sharp jump in interest rates and borrowing costs, they are still at least 50 percent higher than they were two years ago. As of May, the typical home price across Canada was $822,900, with values well above $1 million in the Vancouver and Toronto areas.
“There are very significant economic risks to large cities if housing costs are not controlled,” AB Iorwerth said on a call to discuss the report. “It is becoming increasingly difficult to attract skilled and even highly skilled workers to these cities because they have simply become unaffordable,” he said.
The report is the first government study to attempt to identify a housing shortage and adds another voice to the debate about the mismatch between supply and demand and the causes of the country’s housing affordability problem.
The CMHC, the federal government, and most of the real estate industry believe that a housing shortage is the main contributor to rising home prices. But some economists and housing advocates argue that prices have risen due to other factors, such as persistently low interest rates and an influx of real estate investors.
The CMHC report used the years 2003 and 2004 as a benchmark for measuring affordability. The agency described those years as a period in recent history when housing costs were relatively low in proportion to average incomes and a time when the economy was stable. During that period, the average family spent about 35 percent of after-tax income on shelter. This has since increased to nearly 50 percent nationally; 56 percent in Ontario and 58 percent in British Columbia.
In order to bring home affordability back to 2003 and 2004 levels, the CMHC said that the bulk of the 5.8 million new housing units needed in Ontario and British Columbia and that housing costs would have to be much lower.
“Restoring affordability levels in these counties means housing costs are reduced by a quarter to 50,” the report said. Quebec also requires additional housing, although the CMHC said other provinces are still fairly affordable for middle-income families.
The report set targets for home prices to be considered affordable by 2030. For example, in Ontario, the median home price must be $551,000 so that housing costs for the average family are within reach of less than 40 percent of a family’s disposable income. Last year, the median home price in the county was $871,000.
CMHC stresses that lowering costs does not mean that homeowners will see the value of their homes decrease. Mr. AB Iorwerth provided the example of four multimillion-dollar detached homes that could be redeveloped into hundreds of housing units. This will lower the average price. “This does not necessarily mean that anyone will lose the value of their home,” he said.
If economic growth slows significantly or the economy contracts for an extended period of time, the report said less housing would be needed. Currently, the demand from home buyers is down as the cost of a fixed-rate mortgage has doubled over the past 12 months.
With the Bank of Canada poised to continue pushing interest rates higher to stem inflation, there are fears the increases could trigger a recession.
Homebuilders are expected to slow down or cancel housing projects because construction costs have jumped due to a shortage of labor and materials.
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