A prominent skeptic of Ontario’s ambitious housing plan has emerged — Canada’s oldest bank. The province’s Housing Affordability Task Force released a plan to build 1.5 million homes over 10 years. BMO senior economist Robert Kavcic dumped a bucket of cold water on the plan. Not only does the bank say it doesn’t make sense, they hint it sounds like Ontario’s last real estate bubble.
Ontario Promises To Build 1.5 Million Homes Within 10 Years
Ontario’s new housing affordability plan is promising tons of supply. They plan to facilitate creating 1.5 million new homes over the next decade. The strategy involves various provincial interventions, including overriding municipal planning to densify cities. “The highly-publicized Ontario Housing Affordability Task Force recommended building 1.5 millon homes in Ontario over the next decade. Of course they did,” wrote Kavcic.
The Plan Doesn’t Make Sense, Likely To Make Things Worse
The plan doesn’t even pretend to be feasible, which becomes apparent if you understand the scale. “First, that is roughly twice the rate of (already elevated) completions in Ontario, per year,” he says.
Ontario is delivering new homes at one of the fastest rates ever. The province saw 76,114 new homes completed and delivered in 2021, up 14.64% from a year before. It was the highest level of completions since 2004, with only two other years in the past 3 decades higher. Both years were catching up from a previous real estate crash, and clearing a backlog. This provided a temporary boost.
It was the highest level of completions since 2004, and only two other years in the past 30 have seen more completions. Those two years were catch-up years following the previous real estate building boom and bust, providing temporary boosts.
“To put it simply, there is next to no chance of finding available labor, let alone skilled trades, to meet such an increase in demand. Especially against a tight labor market backdrop,” he says.
The elevated completions are occurring in one of the tightest labor and material markets ever. Builders have seen the excess demand for materials add an average of $65,000 per home. Labor costs have also increased 20% over the past two years, keeping up with the excess demand. This won’t exactly lower the cost of housing in any reasonable timeline. More likely, it drives the cost of housing higher in the short run.
BMO Suggests It Sounds Like Canada’s Last Real Estate Bubble
BMO hints at a disastrous setup long-term, which sounds like previous bubble promises. “Second, most of this supply will come to completion after demand has rolled over and the millennial-led demographic boom has peaked, saturating the market for a long, long time. We’ve even seen this exact show before in Ontario…”
Immigrant demand might be a solution to absorb the supply, but that’s now problematic. The OECD forecasts Canada will be the worst-performing advanced economy for the next decade. Actually, the forecast shows its one of the worst performing for the next 40 years, but that’s beyond scope. It’s easy to say the issues are temporary for 4 or 5 years. It becomes a lot more difficult to convince people it’s temporary a decade later.
In addition to slow economic growth, Canada will have competition for immigrants. Canada’s immigrants largely come from economies forecast to be more advanced by 2030. High debt loads, low business investment, and a high cost of shelter may not be the draw it is today.
Even if building housing at that rate was possible, it would be inflationary to costs. It turns out when an economy goes all-in on housing, doubling down on the squeeze isn’t the best option. That’s precisely part of the limiting factor expected to drag Canada’s opportunities.
BMO has been (and is!) a firm advocate of supply, but has said Canada’s latest problem is about excess demand. The bank’s estimate shows excess demand created by the Bank of Canada (BoC) policy missteps is ~6% of GDP. They previously said the share of investor demand indicates capital is mismatched for demand, suggesting the only real fix is higher rates.