Why Ottawa’s plan to ramp up construction may not bring down soaring home prices

The federal government’s massive bet on new construction is unlikely to have a significant impact on rising home prices, some economists and housing experts warn.

The strategy to ramp up new home construction across Canada is a cornerstone of the Liberal government’s updated housing strategy, which itself has been a focus of the 2022 budget.

The spending plan set aside $4 billion to create the Housing Acceleration Fund, a still-in-development program aimed at helping municipal governments accelerate new housing projects.

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Ottawa says the fund will build 3.5 million new homes that it says Canada needs over the next 10 years.

“The key to housing affordability is housing,” Housing Minister Ahmed Hussain told the House of Commons earlier this week.

But some observers say this approach is based on misinterpreted data and politicians’ tendency to oversimplify complex problems.

No evidence that more homes means lower prices: expert

“[The government] Steve Pomeroy, a researcher with Canadian Housing Evidence Collaborative at McMaster University, said he appears to have been persuaded by the suggestion that any offer is good, and if we flood the market with supply, it will drive prices down.

“I don’t think there’s any evidence that’s really going to happen,” said Pomeroy, who called the undersupply argument a “myth.”

Kristen Whitehead, professor emeritus at the London School of Economics, said identifying a lack of supply as the cause of price hikes has been “absolutely consistent” among governments around the world.

“The honest answer to the affordability crisis has more to do with macroeconomics,” said Christine Whitehead, Emeritus Professor of Housing Economics at the London School of Economics. (British Cooperative Center for Proof of Housing)

Whitehead – who said she has studied housing economics over “many decades” – said a narrow focus on accelerating new construction leads to an attractive political proposition but rarely affects prices.

“Most ordinary people think more housing will make things better,” she told CBC News.

“Just building 100,000 homes a year or 200,000 homes a year isn’t going to make that much of a difference in and of itself to home prices.”

Pierre Boulevard made housing affordability a central theme in his campaign for the leadership of the Conservative Party. He also identified a lack of supply as the main reason behind the price hike.

The NDP has been calling for new housing, with a warning against allocating newly built homes to low-income families.

How many homes does Canada need?

The federal government, opposition parties, and many economists have argued in recent years that Canada does not have enough homes for its residents.

a Scotiabank 2021 paper It reported that Canada has the fewest number of homes per 1,000 residents of any G7 country, which the bank described as a “structural housing shortage.”

The 2022 budget includes a similar analysis showing that Canada is below the OECD average of homes per 1,000 residents – behind France, Japan and Germany, but ahead of Australia and New Zealand.

Pomeroy said statistics like those do not sufficiently support the government’s argument for a lack of supply since other important factors – such as the fact that Canada has the second-largest average household size in the Group of Seven – are excluded.

He said the recent pace of new housing construction in Canada has kept pace with population growth – even as home prices hit new record levels.

“When you look at the data, it doesn’t support this idea that we have a short supply, certainly at the national aggregate level,” Pomeroy said.

Canada added more than 271,000 new homes in 2021, according to Canadian Mortgage and Housing Corporation data.

Housing, Diversity and Inclusion Minister Ahmed Hussain has repeatedly said that a lack of supply is the cause of Canada’s housing affordability crisis. (Adrian Wild/The Canadian Press)

Robert Cavic, chief economist at Bank of Montreal, also questioned the government’s ability to spur further construction.

“The challenge here is that we are already seeing a record number of units under construction, and the sector is pushing against labor and capacity constraints as they are,” he wrote in response to the budget.

Kavcic also noted that if the government succeeds in speeding up new construction, it could backfire by increasing material costs and exacerbating inflation, driving up housing prices.

Ottawa says there are other factors that contributed to the price hike

In an email to CBC News, Hussain’s spokesman added a nuance to the government’s argument that a lack of supply had driven up prices.

“There are a number of factors that make housing more expensive, but the biggest offer is supply,” Danielle Medlige wrote.

“However, we recognize that there are other elements at play, which is why we are putting in place multiple measures to reduce unfair practices in the housing market, including bans on foreign home buyers, an anti-flipping tax, and a ban on blind bidding.”

Whitehead said government efforts to boost new supply and change regulations are dwarfed by macroeconomic forces, such as income levels and interest rates.

She said the Canadian government would have little direct control over prices, unless it takes politically toxic measures such as capital gains or inheritance taxes.

“I wish I could be more cheerful about it,” Whitehead said. “What I’m saying is that there is no harm in building houses. You still have to keep building houses and try to allocate them to people in need.”

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