By Murtaza Haider and Stephen Moranis

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In Canada’s topsy-turvy housing market, more supply could mean less affordability, report warns Back to video

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Everyone knows that Canada needs to build a significant number of homes to restore housing affordability, but coming up with an acceptable estimate is an elusive and much-debated task.

A recent report by Oxford Economics has added to the ongoing debate with a new estimate that diverges from those previously put forward by the Canada Mortgage and Housing Corporation (CMHC) and the Parliamentary Budget Office (PBO). Despite the differences in the estimates, the consensus remains clear: Canada needs to build millions more homes — which may still not be sufficient to restore affordability in the high-demand markets of Toronto and Vancouver.

The Oxford report estimates that Canada must build 4.2 million new homes between 2024 and 2035 to restore balance in the housing markets. This equates to constructing 420,000 homes annually over the next decade — nearly 70 per cent more than the average construction output in recent years.

The 4.2 million estimate comprises two segments: nearly 2.9 million homes will be needed to accommodate the new households expected to form during the decade. An additional 1.3 million homes will be required to address the housing shortfall that has accumulated over the years, suppressing household formation. If your adult children are still living with you, they are a prime example of a suppressed household.

The report predicts that affordability will gradually improve over the next decade, as housing markets are expected to rise more slowly than household incomes, bringing homeownership back within reach for typical households by 2035.

However, this optimistic forecast comes with a significant caveat. While affordability is projected to improve across most of Canada, it may not extend to the most expensive and high-demand markets — namely, Toronto, Vancouver, and other areas where housing prices have soared in recent years. In fact, the report suggests that increasing the housing supply in these pricier markets could inadvertently stimulate further demand, potentially offsetting the benefits of additional supply.

The induced demand argument implies that the growth in housing demand — and consequently, prices — will outstrip the anticipated growth in supply, keeping Canada’s high-demand markets relatively unaffordable.

Toronto and Vancouver are similar to global housing markets like New York and London, where demand consistently outpaces supply. This is largely due to physical and administrative barriers that slow down construction and limit the types of dwellings that can be built. The result is persistently high prices and rents.

Oxford Economics contends that the CMHC’s estimate of 3.45 million additional housing units needed between 2021 and 2030 is excessive. Their analysis suggests that only 1.1 million additional units are required. For a slightly different period, from 2024 to 2030, the Parliamentary Budget Office estimates the need for approximately 0.9 million additional homes.

What accounts for the differences in the estimates? A key factor lies in the underlying assumptions driving each calculation, the most crucial being the affordable price threshold. What one organization considers an affordable price point might still be unaffordable to another. Additionally, CMHC’s estimates are explicitly disaggregated to at least the provincial level, whereas Oxford Economics provides only national estimates. The nuances of the most populous and unaffordable regional markets can be lost in nationally aggregated estimates.

The downside of over-investment in housing is the potential undercapitalization of other productive sectors of the economy, such as machinery, equipment, and intellectual property products. This argument is compelling, especially given that the increase in residential sector investment has coincided with a decline in productivity growth — a trend that Wulong Gu, an economist at Statistics Canada, attributes to “a lack of investment” in these other critical areas.

The Fraser Institute supports this view, noting that from 2014 to 2021, housing accounted for 34.1 per cent of total investment in Canada, compared to 18.5 per cent in the United States. During the same period, investments in other productive sectors, such as intellectual property products, stood at 27.7 per cent in the U.S., compared to just 12.6 per cent in Canada.

A broad consensus agrees: Canada must build millions more homes to restore affordability. Even the Fraser Institute, despite its concerns about productivity, acknowledges that “Canada clearly does need more investment in residential housing.” If Canada is serious about improving affordability, it must act decisively and ramp up home construction now.

Murtaza Haider is the associate dean of graduate programs and the director of Urban Analytics Institute at the Ted Rogers School of Management, Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.