The Decibel - Four reasons why you can’t afford housing

Episode Date: August 30, 2024

Buying and owning a home in Canada is an endless source of frustration. Many have been priced out, while competition is high as a lack of housing stock runs up against a rapidly growing population. While more homes are needed to alleviate the stress, getting shovels into the ground isn’t as simple as it sounds.The Globe’s Jason Kirby, Matt Lundy and Mark Rendell recently broke down the reasons behind why most Canadians can’t afford a home right now. Jason Kirby is on the show to explain the not-so-obvious reasons why housing affordability and opportunity is at an all-time low – and whether we’ll be stuck in this expensive loop for generations to come.This episode originally aired on April 2, 2024.Questions? Comments? Ideas? Email us at [e-mail]

Hey there, it's Mainika. Today, we've got one of our favorite episodes from the last year. Hope you enjoy it, and we'll be back on Tuesday with a new episode. By now, you've probably heard all about the housing affordability crisis. On The Decibel, we've looked at the big reasons why housing has gotten so expensive, from Canada's growing population to not enough supply. On The Decibel, we've looked at the big reasons why housing has gotten so expensive, from Canada's growing population to not enough supply. But there's more nuance to this story.

And The Globe's Jason Kirby, Matt Lundy and Mark Rendell recently looked into the other factors contributing to these soaring prices. Today, Jason is on the show to tell us what they learned about why so many people can't afford a home. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Jason, thanks for being here today. Thanks a lot. To start, let's just get a sense of how much housing affordability has, I guess, changed for the average Canadian. So RBC recently put out some figures showing that ownership costs are the highest that we've ever seen. So I guess, Jason, what exactly does that mean? Yeah, so basically it's measuring how much a house costs, all the ownership costs. So it's the mortgage payments, it's the utilities and things like that and taxes.

And, you know, they basically look at it in typical terms. So a typical home nationally would be $800,000. And then you take the median household income of $85,000. And you assume that even if somebody's like, you know, spent years saving up that 20% down payment, what are their ownership costs going to be as a share of their income? And it's like 63 percent on a national basis. And then if you go into specific cities like Toronto or Vancouver and Toronto, it's 84 percent of your income will be eaten up by home ownership costs and 103 percent in Vancouver. So again, these are typical and in median terms and stuff like that, but it's still just, it represents over time,

just how out of whack homeownership has gotten for Canadians. Yeah. Yeah. I mean, when we're talking about something about like, you know, you know, 84% or something, we used to think about, you know, the rule was like housing should cost what, 30% of your salary. So. And I mean, in this case, no, no bank is going to lend you at those terms either, which makes it harder. But if you're somebody in that boat, you need to have parents who are going to be providing larger down payments or the like. Not everyone can do that. Yeah. And so is this unique to Canada?

Because we are, of course, also hearing about surging costs of housing in parts of the U.S. Yeah. Canada and U.S. are often compared. You hear that. And I mean, for a long time, our housing markets kind of moved in tandem. And they started rising, you know, in the 2000s. And then the U.S. peaked and had that horrific bubble and the crash and devastated the economy down there. And it took them a long time. You know, it wasn't until I think 2019 or 2020 that their housing market recovered. We back in after 2006 kind of had a little dip, but the housing market just kept going. And so at this point, you know, the U.S. typical house housing market is about 20% higher than it was at its peak in 2006, whereas in Canada, this is all in inflation adjusted terms, so real dollars, it's over 100% higher than it was. So we really have just gone, you know,

in very different directions, but our incomes haven't really. Our incomes have risen faster, but not that much faster. So that's why we in particular have this extreme situation where we've got like these outrageous house prices, but incomes have not kept pace. All right, so let's actually get into the reasons here. So, of course, the big reason why housing is expensive is because there's a lack of supply for Canada's growing population, right? So in a nutshell, we just we need more houses. But it's not as easy as it sounds, right? So today we're going to talk about more of the nuanced reasons behind this. We're going to focus specifically on four of them. So the first one, Jason, is the difficulties getting houses built in the first place. So what is going on there? Yeah, well, there's two steps to that as well. There's getting the approval to get a house built, and then there's actually the construction time. So we'll deal with the first. And it's about navigating the red tape. You know, you need to go through permitting processes and then revisions to the permits,

and then studies have to be done and public meetings. This is, you know, to build apartment buildings or even just for a single family home. But it's apartment buildings that we are focusing on right now so that we can actually deal with some of the more en masse challenges with housing. Basically, over time, all of these rules and regulations about how buildings should fit into communities, not cast shadows, energy efficiency requirements and all that, that kind of stuff builds up over time. And so we have seen this situation where the approval time for projects has ballooned and ballooned. And, you know, and when you consider that CMHC is estimated, we need 3.5 million, you know, units by 2030 to restore affordability. And it's taking, you know, for instance, in the city of Toronto, it's 32 months to get approval. And in 2016, it was 16 months. So that

really shows just how much longer it's taken. That just multiplies and becomes a bigger problem when you have those kind of delays. So that's just getting to that first stage. That's just getting the approval to actually go and actually construct a new building. So you said something interesting there that, you know, there's kind of, you know, that's the first step, but the knock-on effects are, it's more expensive, essentially, in the end. So if a project is delayed like that or takes longer, why is it more expensive? One study, just to put a number to that, one study has found that approval delays alone have added about $50,000 to the price of a Toronto condo since 2020. Between that and the actual construction times expanding, it affects things in a number of ways. It exposes developers to risk, a number of different risks. They have to take out construction loans. So you've got interest rate risks. The longer this goes, you're being exposed to labor supply risks as we've come through this period of tight, really tight labor markets. So you've got inflation risks, you've just got all these different risks.

And as a result of that, you're just basically going to see developers maybe more hesitant about starting projects. They're going to bake those risks into the cost of the units. And that's going to be handed down to the end buyer who's going to be buying that property. So it just has

this knock-on effect. Okay, so that's how that first factor really leads to it being more expensive for the buyer in the end. The second thing we want to talk about, Jason, is the actual timeline to build something. So this also seems to be getting longer. How much longer is construction taking these days? Yeah, you're right. It is getting longer. The average time for construction of apartments is like 23 months, up from 18 months a decade ago. And construction timelines are rising for every type of homes, not just apartments, single family homes and everything. But again, the apartments are what we're focused on. That's what we need the most, multi-unit buildings. And those by far take the longest to build. There's not only the approval process, but just the types of buildings being built now.

They're smaller, they're taller. They're smaller because they're having to be squeezed into different parts of the cities where back in the 60s or 70s, there was a lot more open space. Now you're squeezing it into a grocery store that is being converted. And so it's a smaller space. You're building taller buildings.

All of these things have made it more complex for the actual construction. And I understand that productivity is also kind of a factor here in terms of like how productive a construction site can be. What does that mean? Yeah, well, productivity is a problem that the Canadian economy as a whole has been facing. And you hear a lot about it right now. It's basically a measure of how much work a worker can get done in an hour. And you measure that over time. It's basically real GDP per hour. Overall, the Canadian economy is, like I said, struggling with low productivity. but the construction sector in particular had been stagnating in productivity. But since the pandemic, the productivity has declined by something like 11%. and harder to build, but you're also having the fact of labor issues and labor supply.

You also have problems with a lot of construction companies are smaller. They don't necessarily have access to the capital needed to invest in the kind of tools that would make their construction sites more productive. So all of that kind of has just one more knock-on effect that shows up in higher prices. Yeah. Of course, the federal government has tried to do something about these issues, right? This fall, it introduced funding for a housing accelerator fund. This is like incentives, essentially, to try and speed up building. Jason, just remind us, what exactly were these incentives? And I guess, have they been working? You see different incentives, like the federal government has cut goods and services taxed

for developers working on new rental apartment units. Some provinces have done similar, removing the sales tax for purpose-built rental. And, you know, the government, federal government has also got programs for making more low-cost funding available to developers, again, geared to rental. And the good news is, yes, it is actually starting to work. We do see the latest numbers from CMHC on housing starts. Apartments, our rental apartment construction is hitting record levels now. You know, Ontario, here's an example, over the last

12 months built 18,000 units. That's back in line with the number of units that were built in the 1990s. So we are kind of coming back to that peak. But again, when you think of that CMHC number of we need 3.5 million homes by 2030, I think it is. And we're talking about, hey, we've got a record number of 18,000 units constructed. That's apartment rental units. It doesn't count all the other types of homes. But again, 18,000 is a drop in that bucket. Yeah, we've got a long way to go there. Yeah, long way to go.

We'll be back after this message. All right. So the third factor we should talk about here, Jason, is the issue of supplies themselves and inflation, which is a factor it seems to be in almost everything these days. It's affected most of the economy, but it's been particularly hard on building supply. So how much have we seen prices increase here? We've seen prices increase a lot, particularly in Toronto. You know, from 2017 to 2019, there was price escalation. It was fairly stable, but then things exploded.

And, you know, it's not just Toronto. Nationally, prices are 60 to 70% higher than they were in 2017. But just to give you a couple of examples, well, remember, all of a sudden there was, during the pandemic, people talking about, oh my gosh, nobody can get lumber. Yeah. You know, two by fours exploded in prices. So you would see, like, the price of lumber going from $400 per thousand board feet up to $1,500 in US dollars by 2021. And, you know, it's come down, which is good. It's sitting at around $600 now, but that's still higher than it was, higher than the long-term average. And so these price shocks just added

to the difficulty. Wood product inflation is now back down to around zero. That's great. But concrete inflation is something like 11% and steel is still at 8%. So that's higher than the overall inflation rates. And these residential construction price indexes that Statistics Canada publishes, those are actually used by municipalities for setting the fees, the developer fees and permitting fees as well. That all feeds into that. So when you have those prices escalating, you then also had developer fees rising. And again, just those are some of the price frictions that developers have been facing.

Yeah. And so just, I guess, to really hammer home, like the reason slashing interest rates, you know, as an emergency measures to save the economy. expected to a lot of people sparked this boom in demand for housing. It shouldn't have been a surprise given that anytime the Bank of Canada slashes rates that way, it leads to demand. That's Canadians love buying houses. And, you know, FOMO is strong in Canada, the fear of missing out. And so when rates are cut so drastically, everybody thinks I better get in now before I miss out. And that's exactly what happened. So you had this surging demand mixed with supply kind of mismatches. And so that was part of it. Just bringing in supplies, all the shipping got disrupted.

So that was a large part of that. Okay. All right, Jason, we're at the fourth reason now. And this is, of course, that boomers are not selling their houses. And we don't want to blame everything on boomers. This is not why we have the housing crisis. But there was a thought that as people got older, you know, they would sell their house and this would help alleviate some of the housing shortfalls. So what did you learn there? Yeah. So this was something that for the last 20 years, you would hear this idea that, okay,

well, yeah, prices are rising really fast. but one day all these seniors who are living in their homes are going to be selling and all this housing supply is going to hit the market and this will be the solution. And that got talked about so much and it has not been borne out in reality. One way you can look at it is sell rates. So CMHC has looked at for homeowners who are 75 and over, the sell rates, meaning the share of those homeowners in that age category, have been declining. So it was 42% in the 1990s on a national basis, and now it's 36%, the most recent period from 2016 to 2021. So that's that idea that there was going to be this rush of homes coming

available is not played out at all. Part of that is because people are just aging in home longer. They're being encouraged to do that. And they also are wanting to do that because we've just gone through a pandemic where people who were particularly hard hit, if you were in retirement homes or long-term care homes. So there's this idea, I'd be, I'm much better to be living in my own home, but also where is somebody going to move if they do sell, if they don't want to go into a retirement home, if they wanted to downsize to a condo, well, those condos are now more

expensive than they were. So there's different forces that are leading to that. And again, people still talk about, well, at some point they're going to be selling, all these seniors are going to be selling their homes. But what we're seeing, the oldest of the baby boomer cohort is just now hitting their mid-70s. And that group,

if you just look at the the 75 to 79 year olds, their cell rate is only about 22%. And it doesn't really start to rise until people in their late 80s or in their 90s when the cell rates get to 55% and 72%. Well, that's 15 years, you know, 10 to 15 years down the line. So it's certainly not a solution. Right now, it's kind of wishful thinking, wishful hoping that there's going to be this bevy of homes coming available as seniors move out. Yeah. And so even if we did see, you know, seniors start to sell their homes en masse and move out, how much of an impact would that actually have on housing availability?

Well, it potentially does have a big impact because boomers and people in that 55 to 75 year range are the largest single cohort of homeowners. So I think they account for about 41% of all homeowners are in that age group. So it is potentially a large demographic that if they were all of a sudden to move out and who knows where they would go, but there would be a flood of new homes. But it's not really matching the influx and demand that we've got. Yeah. Just lastly here, Jason, I mean, the people who are trying to get into the market right now, of course, are millennials. This is kind of the generation that's losing out at the moment. But what does this all mean for people coming after? So Gen Z and even, you know, Gen Alpha afterwards, I guess, are we kind of doomed to have these rising house prices forever or what's in store for them?

Yeah. Well, and now you're talking, you know, in a 10, 20 year time frame of looking in the future. And, you know, perhaps we will see partly some of that, the effect of, you know, as seniors age out of their homes, that that will come on market. But one report from The Economist at Alberta Central, they represent credit unions, they looked at what would it take to restore affordability to the long-term average. And nationally, you would need to see price drops of around 30%. In Toronto, price drops of 40%. Or on the other hand, on the other side, you would need income increases of like 36% of an income jump. Or in Toronto, incomes would need to rise, you know, 65%.

Well, it's unlikely to see either of those particular things happen. You know, one thing we do see starting to happen, people are trying to find ways to solve the affordability crisis themselves by moving to places where they think that they can get more affordable homes. And so we're starting to see that, you know, in interprovincial migration. And one of the big trends there is Ontario is on a net basis, an exporter of people to out west, particularly Alberta. And the one demographic that is becoming outsized in that is the millennial younger Canadians. And so, you know, on a very large large scale you see this migration of people of young Canadians trying to find more affordable homes. We have a fast-growing population and even with some of the measures that have been brought in to kind of slow that down it's still Canada is still a very attractive place that people want to to live in. The problem is you have to build for that.

We had a line in the piece where we live in this upside-down world where the movie Field of Dreams, this idea was if you build it, they will come. Well, we've had this upside-down reality of people have come, but we didn't build for it. And we're still not building near at the pace that we need to, to satisfy that new demand. So if we started doing that, if we, if we did that on a massive scale, then maybe for those, for the Gen Z and the generations after that, hopefully we do, and they won't be in the same, same kind of crisis situation that we are now. You know, we're certainly not going back to that era that my parents enjoyed and of being able to buy a house for $20,000, $25,000. Wow.

Now that was in the 1960s, but, you know, that's an era that's gone now. Yeah. Jason, this was really interesting. Thank you so much for taking the time to walk us through this. Thanks for having me on. That's it for today. I'm Maina Karaman-Wilms. Our intern is Manjot Singh. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin.

David Crosby edits the show. Adrienne Chung is our senior producer and Angela Pachenza is our executive editor. Thanks so much for listening and I'll talk to you tomorrow.