The Decibel - Will 3.45 million new homes solve Canada’s housing crisis?

Episode Date: September 26, 2023

A recent report from Canada’s federal housing agency, CMHC says we need 3.45 million new homes built by 2030 in order to reduce skyrocketing housing costs. Supply has long been an issue especially in the expensive markets of Toronto and Vancouver. But, is it possible for Canada to ramp up construction so drastically and what happens if we don’t?The Globe’s Real Estate Reporter, Rachelle Younglai, is on the show today for a reality check on what can fix Canada’s housing crisis.Questions? Comments? Ideas? Email us at [e-mail]

Canada is facing an affordability crisis. And at the heart of it is the country's expensive housing market. Earlier this month, the Federal Housing Agency, CMHC, released a report saying we need to build a lot more homes to make things affordable. 3.45 million more homes in the next decade. And if that number sounds high, it is. The Globe's real estate reporter, Rachel Younglie, is on the show today to give us a reality check on this 3.45 million number and whether it could actually fix the housing crisis.

I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. Can we just start off by defining what exactly do we mean when we say 3.4 million homes? Like, does that include apartments, other dwellings, or is this just like a freestanding house? What's included? Yeah, so it includes all types of homes. So it could be a detached house. It could be a apartment unit, something that you just rent. It could be a condo unit. It could be a semi-detached house.

It could be a townhouse. It's anywhere you live. Okay, so that's our goal, 3.45 million. How many houses are actually being built in Canada every year right now? We average about 240,000 a year. So by the end of 2030, that means we would be building 1.9 million homes. CMHC is saying that we need 3.45 million in addition to the 1.9 million that's currently on track to be built by the end of 2030. Okay, so do some fast math here. So if we're adding 1.9 and 3.45, so that's over 5 million?

Exactly, over 5 million. Okay, so we need to build a lot. And it sounds like at our current pace, we're nowhere near that. Nowhere near that. And if they wanted to reach that goal, they'd have to nearly triple the pace of construction. Is that a possibility? Not right now. No, it's not a possibility right now. Because first of all, there's a huge skill trades shortage. There aren't enough construction workers. Material costs are very high. The cost of borrowing is very high. So for some developers, it's prohibitive to build. So no, it's not possible right now.

What have experts said about this figure? Well, the real estate industry agrees with this number. They think that, yes, a lot more housing has to be built. A lot of economists from the banks also believe that there's a supply shortage. There are some economists that think that this number is like a number taken out of the sky. And I would say that most people and most of industry would say that it's not realistic to meet that target because it's so difficult to build right now. If experts are saying that that 3.5 million number is basically not possible to reach by 2030, I guess why is the CMHC putting out reports aiming for that? If it's maybe an unattainable goal. Why bother doing that? I think CMHC wanted to put a number on it to show the public, to let the public know,

to let policymakers know that there is a massive supply shortage. And I think that they've achieved that because everyone is talking about a supply shortage now. A year ago, two years ago, three years ago, people were not talking about it. So I think if that was part of the message was to convey the scale of the problem, they've achieved it. Okay. Let's dig into this number, this 3.45 million. Let's actually look at how the agency came to this number. Do we have any sense of what the CMHC actually says about how they got that goal? So they didn't just look at population growth.

They also looked at the country's projected economic growth as well as income growth. And that's how it's very complicated way they derived this number, but that's how they came up with it. So it was a number of factors that came into 3.45 billion. Their goal is for housing to be affordable. And so it wasn't just, let's build enough houses to meet the demand from a growing population. It was, how do we make homes affordable? And affordability is a huge part of this conversation, which I do want to get to right after this. But just to stick with the idea of this number for a second, why did they want to put a number on it? Like, why do they want to have out here in Canada for people to know this is how many houses we actually need?

Yeah, well, a lot of policymakers and the real estate industry talk a lot about the fact that there's a housing shortage, but no one has actually put a number on it. And so CMHC wanted to do that. They wanted to give the public a sense of how much new housing is needed. They started looking into this question back in 2017 during our last housing boom. So that's when house prices were escalating quickly in Toronto and Vancouver. And they were trying to figure out why were these prices going up so quickly. And one reason was because there was so much demand. Some of it was foreign demand. And they also realized that, oh, well, supply is not keeping up with this level of demand. And I would say that the first year that

they came up with a supply number, a supply shortage number was last year. Oh, okay. So this is actually a fairly new thing that this organization is doing then? Yeah, very new. Okay. You mentioned affordability is a big part of this. So how does the CMHC define what an affordable home is? So they define it as that you should not be paying more than 40% of your after-tax income. So if you own a home, you shouldn't be paying more than 40% of your after-tax income on your mortgage payments, your insurance, your taxes. If you're a renter, you shouldn't be paying more than 40% of your after-tax income on monthly rent. Okay, so 40% is the goal for affordability. Do we know how much people in Canada are paying now? According to CMHC, across the country, we're paying closer to 50%. And in the more expensive provinces of Ontario and BC, we're paying closer to 60%.

Wow. Yeah. That's a big number. But honestly, for people who are living in those cities, not surprising, unfortunately, right? Do we know how they got to 40%? Why is that a key number here? Yes. So CMHC wanted to pick a period in our recent history where our economy was doing well. And so they picked 2003, 2004, and they looked at housing costs in those two years and they found that the country as a whole was not paying more than 40%. And so that's how they came up with the 40% metric. Okay. And why, like you said, 2003, 2004, what was going on in those years that made them want to look at that period of time? Housing costs were relatively low,

and the economy was doing relatively well. All right. So both of those things that are not actually the case right now. I was wondering too, because we were looking on the CMHC website and there was an article from 2018 that was saying 30% of household income was considered affordable. So why would it be 30% a few years ago and now 40%? Is this something that I guess changes? Yeah, I think the CMHC thinks that 30% is too low. It's not realistic, given how quickly home prices and rental rates have risen. And a more realistic gauge is 40% of your net income, not 30% of your net income. Yeah. And I mean, that's not an insignificant savings, right? Like that's, I don't know, a trip or dinner's out. Like it's kind of a different, you know,

different lifestyle choices right there. Yeah. Of course, some people have managed to buy a house in some of the more expensive markets of the country. In the Toronto region, the average home costs over $1.1 million in July. And in the Vancouver region, it's even more. It's $1.2 million. So if you bought a house in one of those markets for over a million dollars and all of this extra supply, we build all these extra houses that come online here, are you going to be stuck selling your house for, I don't know, $500,000 or something? Because that's a huge loss. Yeah, that's a good question. And according to CMHC, they don't think that home prices are going to drop 40, 50% over the next eight years when more supply comes on stream. They suggest that you could still get the market value for your house, because say you sell your house, maybe someone will come and buy that house and redevelop it into a four-story apartment or a bigger building with 20 units.

They don't think that you're going to lose value on your home. So that's what they've said, at least. That's interesting, though, because it's kind of like a win-win of both situations, right? If you bought a house at an expensive price, you'll still be fine. If you haven't bought a house, you'll still be fine. I don't know. It seems difficult to really believe it's going to shake out that way. Yeah, it does. Yeah. So does that mean that people who did buy at a huge cost, like might they end up kind of screwed in the end if we do end up building this much and the supply does increase?

I mean, maybe they would be completely screwed. But maybe they won't make as much as someone who bought their house in the 1990s and sold it last year would have made. So maybe they won't make as much as they would have made, but I'm sure they won't lose 50 percent of the value of their house. We'll be right back. It is interesting because CMHC has chosen to focus on supply here, right, when we're talking about this 3.5 million number. But there's always another side to that equation, right? So how does demand factor into all of this, Rachel? Yeah, you're right. CMHC was only looking at supply in this report, and the other side of the equation is demand. And there

is a lot of demand right now because we have a lot of people migrating to the country. So demand is coming from new permanent residents and new temporary residents. But demand is also coming from investors. And a lot of people own more than one property. So demand, I mean, demand is important. We should know where the demand is coming from for sure. And when you're talking about people owning more than one property, I mean, investors must play a role in this as well. Yes, investors play a huge role in contributing to the competition when you go out to buy a home and pushing up the price of a home. If you look at the most recent data from the Bank of Canada, it shows that 30% of purchasers were investors.

Oh, okay. So it's significant. It's significant. It's a huge number. Let's say that the demand from the investor side does continue. Could that mean actually we get to a place where housing prices don't necessarily come down because even if we're building more, the demand is still high? Yes, yes, yes.

That's not a scary thought to you. So, Rachel, the CMHC, they do seem to have a lot of power here when it comes to advising policy for the government. How did that happen? Yeah, so the CMHC was established after World War II, and it was established to help returning war veterans find housing, get affordable housing. So in a way, they're going back to their roots because in the decades that followed, they became more known as a mortgage insurer. And they still are a mortgage insurer, but they do a lot more right now. In fact, they're in charge of implementing and administering the federal government's national housing strategy, which is a huge $80 billion program to help create more affordable housing in the country. So it sounds like their role has really expanded in the last few years, I guess like during the pandemic or during the current administration, that that's when their mandate has expanded.

Yeah, yeah. Under the Trudeau government, their mandate has expanded and they've been put in charge of the national housing strategy basically. Okay. Yeah, and during the pandemic, I would say that their role also expanded then because they were in charge of rolling out a lot of the emergency relief measures, like the rent relief for commercial real estate. Okay, so now that the role of the CMHC has expanded,

and now we've got this 3.5, almost 3.5 million homes target. And this is something that governments are really focused on too, right? We're hearing politicians talking about the housing crisis. The federal government announced a few measures recently in response to this housing affordability crisis. One of these measures was the GST tax break for rental housing. So this is actually an old promise that they brought back. But can you just briefly kind of get into that? What is that and how is that being received? Yeah, so the GST waiver basically

is a 5% reduction for any developer that builds purpose-built rental. And by purpose-built rental, I mean apartment buildings that are where units are for renters only. So you're building with the idea that these will be rented? Yes, yes, yes. You cannot buy it like a condo. It's not to be owned by an individual. So this rebate or waiver, this 5% waiver is designed to help spur construction of these apartment buildings.

And so far, it's been received really well by the development industry. There are a lot of developers that are saying that this discount, the GST elimination will help them build thousands more rental units. And it's still early days because the announcement was just made about a week ago. But so far, I've heard from a number of developers who have said that, yes, they're going to build, they're going to start building in the next year, and they're going to, or they'll increase the number of units that they're going to build. So yeah, it has had a really positive effect on the development community. Okay, so that sounds like that's a step in the right direction.

From the experts you've talked to, what else could we do maybe similar to something like this to actually get closer to that 3.5 million number? A lot of policymakers talk about removing the red tape that comes with development in the municipalities. There is talk about increasing skilled trades workers. Maybe they could set up a different immigration stream for skilled trade workers. CMHC's deputy economist has talked about the fact that building has to become more efficient. There needs to be better improvements in construction because it takes a long time. Maybe one way to speed up construction would be to have these prefab homes and they could just be put together very quickly. So there are lots of ideas out there.

So it sounds like there are a bunch of ideas out here and there are things that are happening. But ultimately, this is a really difficult goal to achieve, that 3.5 million houses number. So just to end, Rachel, what happens to housing costs if we don't end up hitting that goal? Housing becomes more unaffordable. I mean, we've already seen a huge escalation in home prices over the past 10 years and rental rates are very high, over $2,000 a month across the country, which is very high. And so it just becomes more unaffordable, which is why the CMHC put out this report, just to try to figure out a way to tackle unaffordability. Rachel, thank you so much for being here today. Thank you.

That's it for today. I'm Mainika Raman-Wells. 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.