Ontario’s Plan To Build 1.5 Million Homes Isn’t Possible, After Peak Demand: BMO

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. 

5 Comments

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  • Trader Jim 7 months ago

    In the next 10 years can will eliminate oil, increase demand for oil by accelerating building more homes and concrete (yes, oil is used to make concrete), make everyone rich and lower home prices at the same time.

    If your BS alarm isn’t going off, you’re either about to get very rich by perpetuating the nonsense or you’re too dumb to have a valid opinion.

  • Scott 7 months ago

    Am I missing something? What would a non beneficial ownership tax do other than balance municipal budgets and make those who want to stay hidden pay for that privilege? Crash the price of housing so the criminal element goes somewhere else? It’s just the cost of doing business, legally or not.

  • Dennis_K 7 months ago

    I’ve gone through the Task Force’s ‘report’, and have to say, it’s pretty disappointing in how biased it is. But I guess that when you have 6 of the 9 panel members who profit from ‘more building’, I guess we shouldn’t be surprised.

    Odd thing about the report is that there actually is no discussion of ‘affordability’ – it automatically assumes that it’s related to supply, with no real justification for it, in terms of population, employment and demographics. They are only relying on ONE piece of information to suggest a physical shortage in supply – the oft-referenced Scotiabank note regarding comparisons to other G7 countries (which itself is flawed — I’ve read it) – but NO other factors regarding housing affordability are examined. There’s absolutely no examination of any other factors – in particular the ones that have really lead to the affordability crisis — as BD readers already know, which are the presence of non-essential buyers, excess liquidity and industry interests.

    I also couldn’t find ANY verifiable justification for saying that the province needs 1.5 million homes are needed over the next 10 years – that number just seems to ‘appear’. Hence, they also failed to articulate or provide any quantifiable evidence as to how increasing supply will bring selling prices back down to the realm of median affordability — it’s all just ‘assumed’ that if you build enough, all will be fine. But how do you expect prices to DECLINE back down to median affordability without building an OVER-SUPPLY? No manufacturer / builder ever wants to build more than they can sell — and that’s the only way the supply-narrative people could ever get prices to be commanded LOWER — so who’s going to do it?

    They state in the report: “During our deliberations, we met with and talked to over 140 organizations and individuals, including industry associations representing builders and developers, planners, architects, realtors and others; labour unions; social justice advocates; elected officials at the municipal level; academics and research groups; and municipal planners. We also received written submissions from many of these participants.” Funny thing is that they don’t identify who these individuals were, where their interests lay, what did they say or submit (there’s no documentation provided), which ones did the panel actually listen to and incorporate, and which ones did they ignore, and why.

    Also stated: “While governments across Canada have taken steps to “cool down” the housing market or provide help to first-time buyers, these demand-side solutions only work if there is enough supply. Shortages of supply in any market have a direct impact on affordability. Scarcity breeds price increases. Simply put, if we want more Ontarians to have housing, we need to build more housing in Ontario.” What bunk! Nobody has asked whether the demand-side mechanisms employed were of the appropriate type or magnitude, in relation to pricing exacerbations. Further, the statement that ‘Shortages of supply in any market have a direct impact on affordability’ is misleading — easy statement to make to frighten people, but what’s left out is the fact that it’s ONLY true when faced with excess liquidity. Sure, something can be very popular, but if people don’t have the money to pay the price being commanded, how is it that the price can stay that high or continue to escalate?

    I’ve looked into housing completions (as provided by the Canada Mortgage and Housing Corporation) from 2006 to 2019, plus housing starts from 2000 to 2005, (as a surrogate for completions, assuming the starts in December in one year are finished by December of the next).
    Over this 20 year period, there was about 3.48 million housing completions across the country, and this compares to a total population growth of about 7.15 million persons (source: macrotrends).
    Noting that over 50% of the completions between 2006 and 2019 were detached houses, semis and duplexes based on CMHC data (i.e. 3+ bedroom configurations), and assuming the same ratio between 2000 and 2005, that means these ‘homes’ could theoretically house at least 4 x 1.74 million = 6.96 million individuals, and that doesn’t include the remaining 1.74 million completions classified as ‘apartments and other’. Given that not all 7.15 million persons added to the population would require their very own self-contained home (i.e. a 1:1 ratio), it seems highly implausible that there is a housing shortage in any absolute sense. And even so, how could you measure population growth, if people didn’t already have a place to live?

    A really disappointing ‘report’ – to me, more of a propaganda piece, where someone who already decided to ‘build more’ because it suits their interests simply wanted to look semi-legitimized by having this panel convened..

  • Arthur 7 months ago

    Strong multi level government actions are required, but are sadly unlikely to be happening, in order to resolve this long term catastrophe. Canadians are on their own for the foreseeable future!
    Some folks are already adjusting to weak government norms by speculating on future political inaction.
    Eaxmple: Working from home is set to continue – but where will future employees live? Employers and prospective employees want the best deal for themselves. The best deal for both might be to look at cheaper labour and housing markets – anywhere but Canada apparently is the market!
    Good luck on your lonesome!

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