Inventory down means prices up
The lack of housing inventory in Canada is expected to have a significant impact on home prices. With limited supply and increasing demand, home prices are likely to continue rising. The current supply-demand imbalance has made the housing market recovery appear stronger than it actually is. The Canadian Real Estate Association’s senior economist, Shaun Cathcart, mentioned that the market would be expected to be stronger given the demographics, but the limited supply is causing the impact to be primarily reflected in prices.
In recent months, the MLS home price index has increased by 2% in April and another 2% in May. This rapid growth in prices is significant, almost reaching pre-COVID levels. While the demand may only be mediocre, the scarcity of available listings means that multiple buyers are often competing for the same property, driving up prices.
One key difference between the current market and the boom experienced during the COVID-19 pandemic in 2020 and 2021 is the composition of buyers. During the pandemic, the market was driven by existing homeowners moving around, creating activity on both the sales and new listing sides. However, in the current market, many existing homeowners are holding off from selling because their current mortgage and interest rates are more favorable than what they would obtain if they were to move. As a result, the new listings are primarily coming from first-time buyers who are motivated by relative affordability compared to rising rental costs.
Overall, the lack of housing inventory is likely to continue driving up home prices in Canada, with the imbalance between supply and demand playing a significant role in the market dynamics.
Construction labour shortage making housing supply gap even worse
The construction industry in Canada is facing a significant labor shortage, with tens of thousands of job vacancies. This shortage is expected to worsen due to an upcoming wave of retirements. Experts, such as Reva Bond, the dean of the construction school at the Southern Alberta Institute of Technology, believe that the labor shortage will persist and potentially increase over time.
According to Benjamin Tal, the deputy chief economist at CIBC, the job vacancy rate in construction is at a record high, with approximately 80,000 vacancies in the industry. These vacancies not only drive up building costs but also hinder productivity. This shortage comes at a time when the residential construction sector is under pressure to meet the housing demands of a growing population.
The Canada Mortgage and Housing Corporation (CMHC) has projected a need for 3.5 million more homes by 2030 than what is currently being built in the country. However, the number of new homes constructed has been declining, from over 271,000 in 2021 to 260,000 in 2022. In May of the current year, the annual pace of housing starts experienced a 23 percent month-over-month drop. As a result, the CMHC’s chief economist predicts that only 210,000 to 220,000 new homes will be built by the end of this year.
The CMHC identifies several factors contributing to this housing gap, including labor shortages, higher interest rates, rising building costs, and zoning issues. Addressing these challenges will be crucial to meeting the housing needs and improving housing affordability in Canada in the coming years.
Canada needs real estate investors
I understand your perspective on the importance of housing investors in Canada and the role they play in providing and maintaining housing for millions of Canadians. Investors do contribute significant capital and assume risks in the construction and ownership of housing, which helps address the growing demand for housing due to population growth.
It is true that investors play a crucial role in financing and facilitating large-scale housing developments, which can have lengthy planning and construction periods. Without their involvement, the rate of new housing supply could slow down further, exacerbating the housing affordability challenges faced by many Canadians.
Furthermore, a substantial number of Canadians, particularly in cities, live in rental housing provided and maintained by investors. This highlights the significant role investors play in offering rental options and meeting the housing needs of those who are not ready or interested in homeownership.
It is essential to acknowledge the risks that investors assume in homeownership, including potential financial burdens such as negative cash flow from rental properties. Recognizing their contributions and the costs they bear while providing rental housing can help foster a more balanced perspective on their role in the housing market.
However, it is also important to consider the concerns raised by housing advocates who argue that investors owning multiple dwellings can restrict homeownership opportunities for first-time buyers. Balancing the interests of investors and aspiring homeowners is crucial to ensuring a sustainable and inclusive housing market.
Efforts to address the housing deficit in Canada require a comprehensive approach that involves multiple stakeholders, including investors. While appreciating the important role investors play, it is also necessary to explore other solutions, such as government intervention, affordable housing initiatives, and supportive policies that promote housing affordability and stability for all Canadians.
By fostering a constructive dialogue and finding a middle ground, Canada can create an environment that welcomes responsible investments and supports the diverse housing needs of its population.