The Canadian Government’s Housing Plan Makes No Sense and “Won’t Happen”: BMO

Canada’s latest budget sets ambitious housing supply targets, but it’s mostly hot air. BMO broke down the Federal government’s new supply measures for Capital Markets clients this morning. If possible, the plan in Budget 2022 to double home construction shows they still don’t understand inflation. Or Millennials, come to think of it. Though it doesn’t matter, since the plan is so bad there’s virtually no chance it goes anywhere. 

Canada’s Impossible Housing Proposal Makes No Sense

Canada’s ambitious plan isn’t grounded in logic and doesn’t appear to have looked at the data. It’s as though someone with no experience did no research, and then worked backwards to justify a plan.

“Canada’s 2022 budget went all-in on housing, including a highly ambitious (maybe lofty? Impossible?) goal to double the rate of housing construction over the next decade,” wrote Robert Kavcic, a senior economist at BMO.

He included a chart to show “how extreme” this published goal is.

Canadian Housing Completions Forecast

The number of new homes completed and the Canadian Federal Government’s Budget 2022 plans for housing completions.

Source: Canada Mortgage and Housing Corporation; Haver Analytics; BMO.

The plan makes the current supply level look microscopic, though it’s not. Canada’s economy already devotes 1 in 10 dollars of economic output to just building houses. This is much higher than the US during the peak of its bubble in ’06, and Canada wants to double the output dedicated. Some might say it’s reckless to double down on housing in a bubble. 

“Canadian completions are already running at the highest level since the 1970s, and will possibly push through that mark soon given there are 340k units (a record) under construction,” said Kavcic.

Canada’s Federal Housing Plan Won’t Happen

The prominent economist warns the public not to get too excited since the plan won’t happen. “Dollars to doughnuts this won’t happen, and not for lack of good intentions,” he said.

He shared three key reasons this strategy is nearly impossible. 

  • Canada’s building industry is running at capacity. Skilled labor and materials have already become scarce. He argues Canada can’t suddenly double output. If it were possible, it would come at significant inflation. Higher home prices isn’t the goal, is it?
  • Plans to drastically change zonings are “easier said than done.” He warns political pushback would be present, which makes sense. A Federal Government isn’t elected to plan municipalities, and this would be an abuse of power.
  • Demographic demand is forecast to peak over the next few years. Millennials are approaching their peak demand years, at which point demand slows. The second half of the plan, if possible, would be building homes for no one.

The noted economist has expressed several times that he’s sensitive to the need for more supply. However, he has criticized a similar plan in Ontario as simply pandering to what voters want to hear. He maintains this is an issue of excess demand stimulated by low interest rates, highlighting the share of highly leveraged investors.

6 Comments

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  • Erik 4 months ago

    The plan isn’t meant to be implemented. It’s meant to politically “address housing affordability”, while meanwhile backstopping and stimulating real estate. The sad thing is, Canadians are among the most economically illiterate and naive people on Earth. The average Canadian is just not smart enough to understand fiscal or macroeconomic policy.

  • Doomcouver 4 months ago

    They’ve done almost nothing to de-platform housing as a lucrative investment. To then turn around and ramp up building into a bubble is the height of recklessness. Just more gross mismanagement of taxpayer money.

    • CaptainCanada 4 months ago

      “They’ve done almost nothing to de-platform housing as a lucrative investment.” Are you nuts?? You house IS an investment. I am watching Canada turn Communist with every passing day that Trudude is in power. There is no reason to TAX and penalize people that buy multiple homes to rent or flip. All this crap being bounced around will never help the lower middle class buy a home. It is a tax grab but a communist government. Lord help us because most of us have our heads in the sand and our @ss in the air for anyone to kick.

    • The Truth Shall Set You Free 4 months ago

      This is what happens when you have a government led by people who have no real plan. They are in way over their heads and know nothing which is why they are running with ‘real estate good’, ‘save the planet’ and ‘repeat the lie enough times until they believe it’.

  • Vinny 4 months ago

    The only way to get rid of the excess investor demand is to make it a bad investment. Higher interest rates might help, but if your mortgage rate is 5% and inflation is 6% and your cash flow return is 2.5%, then housing is still free money for investors. I agree with more supply because only when there is too much supply which is obvious to investors, will they stop creating excess demand and move on to another asset class other then Canadian Real Estate or the other highly valued countries like New Zealand and Sweden. There is no way the Bank of Canada will increase interest rates higher than inflation. More supply is the only real solution that we can control because we can’t control investors — investors will always find a way to get around rules and restrictions.

    • Dennis_K 4 months ago

      For anyone who really thinks we can ‘build’ our way back to affordability, I wish they would ask themselves this: how much do we need to build, of what type and where, for prices to DECLINE back down to the realm of median affordability? It means we would need to effectively OVER-BUILD by at least 40-50% for prices to DECLINE down to that extent (given the differential between median incomes and prices increased from 3-5x’s in about the year 2000 to over 8-13x’s today). That’s alot of ‘over supply’ that would need to be made available for prices to actually drop. But who in the real estate development / building / financing / sales food chain would want to see that happen? None, of course – that impacts their profits. After all, what manufacturer ever builds more product than they can sell? Further, as a September 15, 2021 article entitled ‘Federal election 2021: More supply won’t solve Canada’s housing affordability crisis’ states, ” … if total supply increases to the extent that prices do fall, developers can always slow down the rate of new construction.” Who says that they haven’t been doing this all along? Claiming ‘slow’ approval processes is a very convenient way to side-step an examination of this question, as well as claiming development charges are excessive (but where nobody who claims this can explain why prices have gone parabolic for re-sale housing as well – to which these charges don’t apply).

      The real estate industry lobbyists simply turn a blind eye by not asking a simple question: what is this ‘demand’ they speak of, based in? Have they asked if the demand is ‘rational’ — meaning, is it only people who live & work in Canada, and need a principal residence, the ones who are buying (and have been doing so since at least the year 2000 – the approximate time the Bank of Canada itself indicated in 2015 that prices were out-of-step of median incomes)?

      We simply can’t ‘build’ our way back down to median affordability — in as much as there continues to be non-essential buyers in the marketplace, along with excess liquidity, and an industry who has a vested interest in keeping supply tight (relative to apparent demand) & prices as high as they are. For prices to reflect local incomes, we need to prioritize housing (through policy) for people who live and work here, first and foremost. Otherwise, who are you really building for?

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