It’s hard to accept, but Ontario is in the middle of a housing crisis. Why is this? Basically, supply is not keeping up with demand. Many pundits and media say this is a crisis of interest rates; however, we believe it is a much deeper failing of public policy at both the provincial and municipal level who are both responsible for the building of new homes and therefore creating supply.
CMHC says the pace of housing starts in Canada edged down to 252,232 in August 2023 down 1% from July 2023. In the next 7 years, by 2030, CMHC says we need 3,5000,000 new homes or 500,000 per year. That is a shortfall of 50%. Immigration is factored into CMHC’s projections, and this effect is not decreasing.
What is Causing the Housing Crisis?
In our previous blog on April 10, 2023 Ontario Home Buying Trends we pointed out that baby boomers are living in their homes 10 years longer and this has increased the demand on the housing stock.
Municipalities’ thirst for development fees vs. raising property taxes have continued to increase the cost of new homes by raising development fees that have continued to increase the cost of new homes built.
The high cost of rent, interest rates, food ,fuel, etc. as shown by high inflation are why Canadians are feeling the squeeze. As a result, Canadian’s are deferring retirement, cutting back expenses and worrying how they will cover their next mortgage payment. Many have extended terms stretching their mortgage payments from 15 years to 25, 30 years or beyond.
The cost of housing in Canada has increased dramatically in recent years. Notwithstanding the recent fall in housing prices, according to data from RPS Real Property Solutions the price of homes in Canada grew over 40% from January 2018 to November 2022 the highwater mark in Canada for Real Estate Prices.
Fundamentally incomes are not keeping pace with inflation with the medium income in Canada is $68,400 after taxes with the average salary above $70,000. With two people in the household making this salary and having one automobile loan of $40,000 at current interest rates they could afford a home of $650,000 if they have saved the required down payment. In September the average price of a home in Canada was $655,507 and in Ontario it was $851,756.
Higher listings and months of inventory ( a Buyer’s Market) have resulted from sellers having an unrealistic expectation of sales pricing, often looking for fall 2021 or winter 2022 prices which were the high prices of the recent housing market in Canada.
Many Canadians have moved to more affordable areas of Canada such as Newfoundland, New Brunswick, and Rural Nova Scotia. This is not without its own sacrifice with less access to healthcare, inclement weather, higher fuel, food prices and higher taxes.
Many Canadians had their savings destroyed during COVID and now don’t have a nest egg to absorb the pressure of inflations.
In summary, the housing supply issue may not be solved in the next few years as the plans of municipalities that I observe may have a gestation period of up to 10 years. Besides their own “red tape” regulatory process the developers and contractors who will do the building are faced by labor shortages in skilled trades for the building industry.
As cited by Benjamin Dachis in May 2023 in a study of Industry Regulation and Competition Policy titled “ Buyers beware: The cost of Barriers to Building Housing in Canadian Cities” published by the C.D. Howe Institute, provincial and municipal governments should cut excessive regulations on new housing development projects and lower the upfront costs on homebuyers to help Canadians grapple with skyrocketing housing prices. Dachis goes on to say the gap between marginal cost of construction for new housing and the market price in major Canadian city areas. This gap shows the extent of the housing market dysfunction. Which can be caused by factors such as upfront development charges, a lack of land for development or regulatory reasons, lack of available transportation options to new land sites, or potential other factors that restrict competition among developers and builders.
Systemic issues and extremely lengthy wait times for development application approvals, especially at the municipal level, are major causes of our home-building delays. In fact, we are one of the most difficult countries in the world when it comes to putting shovels in the ground on projects.
Canada ranks 34th out of 35 Organization for Economic Co-operation and Development (OECD) countries in the average time it takes to obtain regulatory approval for a construction project, according to an ease of doing business index of the World Bank. It’s a very telling and rather appalling statistic for a G7 economy. It is shameful for our country and a true barometer of the problem.
Embarrassingly, it takes nearly 250 days to get a permit in Canada – three times longer than our competitors in the U.S. In the OECD, only the Slovak Republic takes longer.
Recently, we also learned that building applications heading to the committee of adjustment at the City of Toronto have doubled, which has resulted in lengthy delays on building applications that range from extending a deck on a home to tearing down an existing property to building a new house.
Over the period studied, 2011 to the end of 2021, a single-detached home in Vancouver cost homebuyers nearly $1.3 million more than what it would physically cost to build in a market without barriers to supply. Homes in the Toronto area now cost homebuyers $350,000 extra over the cost to build.
It is interesting to note that some large urban areas have avoided such high costs. In Montreal, average market prices for single-detached homes have largely stayed in line with the cost of construction, and the gap has consistently fallen. Notably, Montreal-area municipalities do not charge upfront development charges.
Interest Rates: When do we anticipate Relief?
In setting interest rates for Canada, The Bank of Canada is only concerned about three things: Inflation, Inflation, and Inflation. We all must keep in mind that their target is 2%; however, we anticipate as inflation approaches 2.5% that the Bank of Canada will take the brakes off.
September’s headline inflation of 3.8% vs. 4% in August is encouraging, which was driven mainly by lower grocery prices, costs of durable goods and travel related services although gasoline spiked 7.5% in September. You do have to be mindful that food at 5.8% which remains well ahead of headline inflation in the months we in Canada are growing and harvesting most of our food supply and not having to travel from California, Mexico, and South America.
Although the Bank of Canada is reaching its end point on rate hikes, we believe it is probable to see one more rate hike and possible to see a second if inflation persists between this week’s rate announcement on Wednesday or the further announcement in December.
According to Benjamin Tal, CIBC Economist Buffers that protect consumers from recent rate hikes, namely the pent-up savings amassed by Canadians during the pandemic have slowly whittled away.
It is anticipated if inflation is within target that rates will start to decline between the summer and fall of 2024 with the Bank Rate getting back to 3% over time.
According to Tiff MacKlen, Governor of The Bank of Canada is not expecting a significant economic downturn and continues to see signs of resilience in the national economy. If interest rates don’t decrease, there may be further pain as no less than 57% of all mortgages in Canada will be reset in 2025/26.
Although 5-year Canadian bonds are at 4.461% a 16 year high which have been pushed higher partially due to Provincial and Federal Governments new debt issuance and issuance for bond maturities because of governments borrowing unprecedented sums of money to fund pandemic support programs. This has resulted in the recent higher mortgage rates. This supply of new issuance has also created volatility in equity markets.
Current Interest Rates as of October 23, 2023:
|Purpose||1 Year||2 Year||3 Year||5 Year|
|Refinance with Prime Lenders||6.79%||6.84%||6.54%||6.14%|
Mortgage Fraud: How Much and What is the cost?
Ontario has seen $3 billion per year laundered through Real Estate in Ontario for each year for the last 10 years totaling $30 billion! This is one of the reasons our clients are subjected to such a thorough review of their financial and income history.