Canadian politicians are promising to build millions of homes—an unrealistic plan not grounded in reality. The good news is the country doesn’t need millions of homes to correct the housing shortage, according to BMO Capital Markets. In a new report, the Big Six bank argues that decades of underbuilding is a myth, and the issue was manufactured post-pandemic. Consequently, the acute shortage is much smaller than framed, and could be tackled without unrealistic promises.
Canada Is Promising To Build Millions of Houses Based On A Myth
Canadians are under the impression that the country has underbuilt housing for decades. Consequently, the public is demanding that policymakers ramp up housing targets. Politicians have been spending billions in taxpayer funds to stimulate building, but building has collapsed to recession levels. Despite the targets being mocked as unrealistic fantasies, a panicked public is still looking for promises of bigger targets and more spending.
Fortunately, those inflated targets don’t have to be met since it’s a myth perpetuated by bad economics.
“It has become a widely held belief that Canada has a serious housing shortage. Most analysis focuses on housing starts data from CMHC. Today, we look at an alternative data set: the housing stock,” writes Benjamin Reitzes, BMO’s rates & macro strategist.
The data only starts in 2016 but still provides a solid counterpoint to the narrative, he suggests.
Canada Didn’t Have A Housing Shortage, It Was Manufactured Post-Pandemic
Most Canadians recall the country’s housing issues very differently from reality. Prior to 2020, the housing shortages were primarily in cities like Toronto and Vancouver. The narrative shifted in 2020 with low rates, as investors scrambled to pick up as many properties as possible.
“Most of the serious housing shortages only ramped up post-pandemic, when the population surged,” argues Reitzes.
Timelines are blurry in hindsight, but record home sales and price growth occurred in 2021 as a part of the low-rate boom. The country’s population was slow during this period, due to pandemic-travel restrictions. It wasn’t until 2022 that the population began to hit record growth, when home prices began to collapse due to soaring interest rates.
Reitzes’ chart shows the number of people per home. The trend clearly changes in 2022, when the country sees a massive surge of immigration. Policymakers briefly acknowledge that their targets were a destabilizing amount of forced growth.
Source: BMO Capital Markets; Statistics Canada.
It may not sound like good news, but it is. The unrealistically large promises don’t have to be met for the country to return to a stable volume of housing.
“Indeed, the number of people per unit has risen over the past three years, driven by population growth… in order to return the ratio in the chart to 2016 levels, Canada needs another 600k units,” explains Reitzes.
He further adds, “That’s a far cry from calls to build millions of additional units.”
Canada’s Affordability Problem Is Real, But Condos Won’t Fix It
The supply of housing and prices are often discussed in tandem but aren’t as closely related as people think. For example, Greater Toronto rental vacancies are higher than pre-pandemic. Few, if anyone, expects the region to see much lower rents.
Most also believe using taxpayer stimulus to build market housing will improve affordability. However, the stimulus has primarily served as a bailout for inefficient projects, propping up inefficient prices. It consequently has a counterproductive effect. It stimulated excess demand for materials and labor, inflating input costs and preserving higher prices. At the same time, higher input costs made new projects cost-ineffective, ultimately producing fewer new homes.
This has had a counterproductive effect, stimulating excess demand for input costs and making it more difficult to build more housing.
BMO sees the housing shortage in a similar context. “While the extent of the shortage is debatable, that doesn’t mean affordability isn’t a real issue. Lack of suitable supply (think single-family homes with access to transit) is where the trouble lies. Building more condos likely isn’t the solution,” explains the economist.
This isn’t the first time BMO has fired shots at the narrative of a housing supply shortage. When the population surge first began, they argued there were no widespread shortages. They warned that politicians were intentionally trying to manufacture a shortage, intentionally overrunning the housing supply.
We’re not even going to bring up the fact that Canada has overstated its population growth for at least 40 years. Okay, we brought it up but you’ll have to read about it on your own.
To reiterate, the reality of the market:
– Money laundering inflates home prices
– Canada finds out, floods the market with cheap credit via BoC in2019 when BD said it was to create a QE mechanism. Bank of Canada denied it, then did it less than a year later.
– low rates and buyer stimulus help home buyers absorb the money laundered properties the gov needed them to sell.
– gov then ramps up immigration, and says the home prices that already surged was due to the immigration they were going to bring in
– gives money to institutions to price out rentals, not arguing foreign investors need state backing so they can build investment properties.
Good idea since Brookfield is now a foreign company that needs gov assistance to access the market.
We did it Canada! Elbows up!
Stick it to our kids because they won’t visit us, and hopefully they’ll have to move back home and see us every day!
Pierre will make us the 51st state.
Another sky is falling article from laser eyes. Enough, no one wants to hear it.
Let’s gloss over the fact you are literally here to read it.
Punwasi is interesting if you know him. He comes off as emotional if you don’t realize he has autistic-like bluntness, and is incredibly objective. If you have the pleasure of seeing him speak or meeting him in real life, it’s worth whatever the conference ticket costs. He’s objective to the point he’ll say your plan is predatory but he’ll also assume you don’t think that’s offense (we don’t in finance).
The average person seems to think he’s emotional and exaggerating. That’s because they make the mistake of thinking things like: “it’s not like people sit in a room and come up with plans to screw the public.”
People literally do sit in rooms and come up with supervillain plans to screw you, and judging from some of the people he fights with—he may be telling you the plan he heard when he was in the room when they came up with it.
Still curious about that back & forth with Freeland’s now unemployed finance dept policy guy. Seemed like it implied they both had a long history of backroom discussions.
I think part of the problem is that the markets are quite different across the country.
It is interesting though before we unleashed subsidies for “investors” to buy apartments across Canada at least in the poorer regions rents were lower. Now it’s high everywhere. It’s from government meddling and “helping” the poor…….We need to get our government to stop “helping”it’s clear they don’t have a clue.
Good time for folks to learn that Statistics Canada outsourced rental data and started basing it on asking rents in 2022, thus circularly inflating expectations of rent.
They would never do that with other CPI segments, because expectations also help to set prices. They won’t tell you price growth is stable for rents then all of a sudden goes nuts once they starts using marginal asking rents, without changing any of the back data.
The problem of canada’s housing crisis has always been aboit price, not supply. The big issue is that housing price is manufactured by every level of govt, banks, builders, realtors, and so on.
For the supplu and demand price regulation model to work requires that price and profit are understood and negotiable by both parties.
So in this case, iboight a hpuse in 2008 in toronto for 440k. I didnt nothing to it but basic maintenance till 2022, then i sold it for 1.8m.
So how was that price determined?
Well it certainly wasnt the buyer, who was told by the bank you can ‘afford’ this much of a house. Govts that increase variois levies on housing every year, and contractors who have increased labor costa by 800% since 2009?
The reality is this was a coordinated effeort to get us out of the gfc by using housing to offset gdp losses due to the recession. It worked 8n 2009, and carney is living proof that no oneunderstood that the long term cost of that would be paid now.
If the govt knows that their is a global credit squeeze, originating on mortgages, they can do 2 things – let the banks collapse, housing prices get halved, and starg again. Or, as canada did, spend hundreds.of billions subsidizing bad loans by our private banks in the face of a major recession.
Niw it was a risky strategy, becauss it involved using tax dollars to backstop loans that wsde never a good risk, leavimg you and me holding the bag.
It wirked fije in on and bc, and by 2014, the govt should have curtailed that and forced banks to do better going foreward.
Instead we have a new govt that believed you could inflate housing prixezs for ever, and never pay anything?
So thats why the supply argument is used. If freeland or carney said, hey prices need to fall 50% or more to ‘fix’ the housing crisis they wouldnt be able to run a condo board.
So now we will watch.as carney continues to transfer unmitigated and unfunded crsdit risk from private banks to the taxpayer, increasing hous8ng cosfs, and destroying canadas economy.
We aleeady know they misrepresent cpi in canada, so this.is jyst a minor fib. Not.to.mention, banks will be very happy that you did this!
Not true. Rental data in CPI is based on LFS.
What you’re describing is a pilot project they did (good one because no one was tracking asking rents over there).
You’re both right-data became skewed in 2019, but it was due to the change in how they measured it via the survey.
Starting in 2019 they began hedonic adjustments & some bizarre re-weighing that I still don’t understand why they would choose. Hedonic adjustments do things like lower prices if apartments get bigger but cost the same, or more likely today—increases the cost of the apartment if it costs the same but the size shrinks.
This skews the perception of what people think is fair (for both the landlord and renter), since they’re unlikely to base what rent inflation is on square footage but the actual rent. Big impact on all rents since it changes how much certain cities would allow older buildings to hike on long-term renters.
It is really frustrating that you don’t link the reports you reference.
Great analysis as always. I’ve been saying this behind closed doors for years as I work in real estate with the actual data and it doesn’t match up with the industry narrative l. Oh and I am not allowed to officially contradict the boards narrative.