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.