Change is constant in the financial world these days, except with housing affordability.
Homes were unaffordable in recent years, they’re unaffordable now and they could remain so for years to come, even if we build lots more houses, townhomes and condos. Ramping up construction is widely considered our best weapon for improving housing affordability, but the benefits for those priced out of today’s market will be marginal.
Some basic theoretical housing economics from Frank Clayton, senior research fellow at the Centre for Urban Research and Development at Toronto Metropolitan University: If we build more homes and demand holds steady, then prices will come down and affordability will improve.
There are some smaller cities where this might happen. But in expensive locations such as Vancouver, Toronto and Montreal, demand for housing is on the rise because of immigration and demand from millennial and Gen Z buyers.
“When there’s dynamic demand, there’s just no way that increasing supply is going to all of a sudden reduce prices by 10, 15 or 20 per cent,” Mr. Clayton said. “The only way to do that is what happened back in the late latter 1980s and early ‘90s, and in the first half of the ‘70s – have a big recession, lose a lot of jobs.”
The latest economic numbers suggest a recession is possible, but the timing and intensity are unclear. Meantime, housing unaffordability remains one of this country’s biggest problems. Resale housing prices have fallen sharply on average from the February, 2022, peak, but rising mortgage rates have largely offset affordability gains.
Building more homes is the popular choice of measures for addressing affordability because it sounds both practical and relatively inoffensive to people who already own homes. It’s easier to sell existing owners on housing intensification in their neighbourhood than a policy of curbing demand by taxing the capital gains from selling a home.
But newly built homes aren’t necessarily affordable homes, even if Ontario Premier Doug Ford did recently suggest otherwise. Mr. Ford talked about his government donating land and offering 1,600-square-foot homes to young people with yards and a finished basement for less than $500,000. The average resale home price in Ontario in August was $832,376.
Mr. Clayton said the price of newly built homes is influenced by a variety of costs – for land, for development and for labour and materials. His view is that developers will end up delivering affordability with smaller homes in communities outside urban centres.
As an example, he cited one particular development in Oakville, Ont., west of Toronto. “The housing being built is a combination of a few singles and semis and a few townhouses, but then we have stacked townhouses and low-rise apartments,” he said.
Might there be a technological solution to the need for houses, say prefabricated homes that can be built cheaply? Mr. Clayton says the idea of prefab homes has been around since the 1930s, but never caught on.
The federal government’s housing agency, Canada Mortgage and Housing Corp., issued a study showing how difficult it would be to restore widespread housing affordability with the construction of more homes. CMHC said the number of homes built would have to rise by 3.5 million over current levels by 2030. As of August, the seasonally adjusted estimate of annual home construction came in at 252,787 units.
Expect politicians to press for higher levels of home construction, while developers contend with expensive borrowing costs and nervousness about a recession. Even if lots more homes do get built, there’s the question of how affordability will be affected.
Mr. Clayton sees prices continuing to rise in cities such as Vancouver, Toronto and Montreal, but not by as much as they would have without a construction boom. He said a normal rate of increase is in line with the inflation rate, which averaged 2.6 per cent over the past 10 years and most recently hit 4 per cent.
Meantime, a recession looms over housing. In Toronto, the hard times of the late 1980s and early ‘90s were good for housing affordability but otherwise toxic. “Home prices came off 25 to 30 per cent,” Mr. Clayton recalled. “But we lost 250,000 jobs in the region.”
PERSONAL FINANCE COLUMNIST
The Globe and Mail, October 2, 2023